According to Barrons, there were over 1,000 initial public offerings (IPOs) in 2021 -- one of the largest years ever for IPOs. However, this also means that finding the highest-quality stocks out of this large pool was increasingly difficult.
With the special purpose acquisition company (SPAC) boom happening as well, this year may have been one of the most difficult for finding high-quality companies. But, I was particularly fond of two IPOs this year, and I think DigitalOcean (DOCN -1.52%) and SEMrush (SEMR -1.46%) could be some of the best-performing companies from the IPO class of 2021. Here's why.
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1. DigitalOcean: Swimming in a lucrative space
DigitalOcean is serving as the small- and medium-sized business (SMB) cloud provider by providing a simple, uncomplicated offering to help accelerate the cloud transformation. Big cloud companies like Amazon's AWS or Microsoft's Azure -- while great for large enterprises -- are often too complicated for SMBs, and a lot of the products they have are not what SMBs need. Typically, all they need are basic tools to help them get a cloud presence up and running, and DigitalOcean is helping them do that.
With nearly 600,000 users, DigitalOcean has become one of the primary places that SMBs go to establish a cloud presence. Also with Amazon having three major outages in the past month, more companies are looking to use more than one cloud provider, which means DigitalOcean could be a beneficiary of this trend.
An indicator of DigitalOcean's popularity among its customers is its Net Promoter Score (NPS). The NPS measures customer satisfaction on a scale of -100 to 100, with a score of 70 being considered "world-class." DigitalOcean's NPS is 56, with just 12% of respondents negative on DigitalOcean. Comparatively, Microsoft's NPS is 43 and it has not been above 45 in the past year.
With this level of customer satisfaction, it should come as no surprise that DigitalOcean's average revenue per user increased 28% year over year in Q3, and its revenue grew 37% year over year to $111 million. This customer satisfaction and growing brand recognition as "the SMB cloud provider" resulted in low advertising expenses. Just 12% of revenue went to sales and marketing expenses, allowing DigitalOcean to reach near profitability. In Q3, the company lost just $2 million, and so far this year, it generated almost $30 million in free cash flow.
As DigitalOcean continues to see adoption in this lucrative niche, the company could rapidly expand. It sees an addressable market of $116 billion by 2024 -- almost triple from today. Additionally, as its brand grows stronger because of its SMB-focused product, the company will be able to spend less on acquiring new customers as the industry expands.
At 19 times sales, this company might not be the cheapest stock, but considering its success in this lucrative niche, I think it is worth paying up for.
2. SEMrush: Making marketing easy
SEMrush offers visibility tools that marketing teams can use to make vital insights into the success of their ad campaigns. Advertising can be done through dozens of channels, like social media, search engines, and even public relations. With a fixed marketing budget, companies want to see which avenues are the most effective at reaching their target audience and how they can put themselves ahead of their competitors. SEMrush helps them do this.
With over 50 tools across dozens of strategies, SEMrush has become a one-stop shop for marketing teams. Marketers want insight into their strategies, but toggling between multiple services to do so can be difficult and inefficient. With SEMrush's unique, all-in-one platform, it is easy for marketers to get the best insight. This likely appeals greatly to the company's customer base which could lead to strong retention and growth.
Like DigitalOcean, the company's growing leadership position has led to near profitability. Because SEMRush has such a wide offering, the company does not have to spend a lot of money on developing even more tools, so it can focus on profits. So far this year, it has a net income of $577,000 -- up from a $5 million net loss in the year-ago period.
The key to SEMrush's success is getting its customers integrated into more tools. Revenue growth per customer already grew 20% in Q3, and the company has shown success in expanding revenue per customer since 2016. SEMrush shows that it not only says it offers solid products for marketers, but it appears to be making good on that statement.
This is why I am confident that SEMrush can continue to do so. The company is valued at 17 times sales, which could be too expensive for some investors. However, similarly to DigitalOcean, when a company is dominating its industry and seeing rapid growth while doing so, it might be worth paying up for.
