Bargain Hunters: 3 Innovative Stocks Down 37% to 77% Worth Buying Now

Both the broad S&P 500 stock market index, and the technology focused Nasdaq 100 index are reaching all-time highs right now. But a cohort of the most innovative technology stocks has been crushed in recent months, amid rising concerns about potential interest rate increases and the pandemic. 

Prior to their collapse in stock price, some of these companies were market darlings for most of 2021. It therefore stands to reason that the quality ones will make a comeback, and three Motley Fool contributors think DigitalOcean Holdings (DOCN 0.95%), Lemonade (LMND -0.46%), and Zoom Video Communications (ZM 0.05%) fit the bill. Here's why. 

Image source: Getty Images.

Walking with giants

Anthony Di Pizio (DigitalOcean): The cloud computing industry is dominated by tech behemoths like Amazon (AMZN -1.64%) and Microsoft (MSFT 0.37%). Yet DigitalOcean has found a pocket of the market to thrive in, and it's competing with the big players on price, service, and even product for smaller enterprises.

The company takes a simplistic approach geared toward operators of small-scale applications, like start-ups or small companies, who might fall through the cracks with larger cloud services providers. To cater to them, DigitalOcean has to be affordable, and with bandwidth pricing as low as $0.01 per gigabyte, it's actually the cheapest in the industry. 

Also, depending on end users' requirements and how they configure their services, using DigitalOcean could end up costing less than half the price of a comparable Amazon Web Services offering. 

The company determined that its addressable market was $44 billion in 2020, but it's set to triple to $116 billion by 2024. And so far, it has captured just a (rapidly growing) fraction of it. 

Data source: Digital Ocean. 

It's clear DigitalOcean has significant room for growth, and it's well poised to capitalize with its enormous geographical footprint that spans 185 countries. 

The stock opened 2021 at $42.50 per share, and had risen a whopping 213% to $133.40 by November before tumbling 37% to its current price. It was caught up in a broader tech sell-off that dragged down some of the fastest-growing companies over the last two months. 

But for investors looking to catch a bargain for long-term growth, DigitalOcean is certainly a candidate. It's already profitable, and set to deliver $0.34 in earnings per share by the close of 2021, followed by 70% earnings growth in 2022, according to analysts' expectations. 

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An AI play that could explode

Jamie Louko (Lemonade): Shares of Lemonade have fallen over 77% off their all-time high in January 2021, but the business might be stronger than ever. The artificial-intelligence (AI) based insurance company recently announced an impressive acquisition that could fuel a core part of its fast-growing business. 

The main metric that investors should use to monitor Lemonade's success is its loss ratio, the percentage of premiums the company has to pay in claims. This figure was 77% in the third quarter of 2021, 2 percentage points higher than the long-term goal of 75% management set for itself. While it is higher than its goal, it is an improvement from the first quarter, when it was 121% because of the Texas Freeze, a storm that caused Lemonade to receive a year's worth of claims in just a few days. 

The culprit of this high loss ratio is its growth. Lemonade has been one of the fastest-growing insurance companies, and this has resulted in a hyper-scaling of its product offering. Its AI system needs to make more decisions to increase its accuracy, so when it is new to an industry, it tends to be less accurate. However, as it matures and collects more data, its determinations will be more accurate and its loss ratio will improve. 

The company recently expanded into car insurance, which is expected to be very popular. Instead of organically growing data for its AI, it decided to buy another car insurance company, MetroMile (MILE). This acquisition will bring data on over 400 million trips and billions of miles driven to perfect Lemonade's AI from the get-go. 

The company's car insurance is expected to become a staple of its offerings, and it will likely be a major customer-acquisition driver. The company already has over 1.3 million customers, but car insurance could boost that significantly, along with Lemonade's total in-force premium, which already grew 84% year over year in the third quarter. 

With a massive influx of data that has bolstered a future staple of Lemonade's coverage, the company could see immense growth in customers and premiums, along with major improvements in its loss ratio. With these core business metrics having the potential to dramatically improve, I think Lemonade is a buy right now, despite its 25 times sales valuation. 

Image source: Getty Images.

Reshaping corporate communications

Trevor Jennewine (Zoom Video Communications): During the pandemic, Zoom became a household name, as its popular videoconferencing app (Zoom Meetings) helped families and friends stay in touch, enabled students to learn from home, and allowed employees to work remotely.

But revenue growth has decelerated sharply this year. And while that's completely reasonable, some investors have still labeled Zoom as a "COVID stock," and it currently trades 58% below its all-time high. On the bright side, that creates a buying opportunity.

While Zoom Meetings is still the cornerstone product (and the most popular videoconferencing app on the market), Zoom offers a robust portfolio of communications tools. That includes a cloud phone system (Zoom Phone), corporate conference room technology (Zoom Rooms), and a growing ecosystem of integrations with third-party applications (Zoom App Marketplace). In short, the company unifies corporate communications on a single platform, eliminating the cost and complexity that come with managing multiple solutions.

More importantly, Zoom's entire portfolio should be even more relevant in a post-pandemic world. According to research company Gartner, 48% of employees will continue to work remotely at least some of the time even after the pandemic, and just 25% of business meetings will take place in person by 2024, down from 60% today. That creates a significant opportunity. In fact, Zoom puts its addressable market at $91 billion by 2025, and while sales growth has slowed, the company still put up impressive financial results in the most recent quarter.

Of particular note, Zoom grew its customer base 18% to 512,000, and revenue jumped 35% to $1.1 billion in the third quarter of fiscal 2022 (ended Oct. 31). Those numbers aren't too shabby in their own right, but consider this: In the previous year, Zoom grew its customer base 485%, and revenue skyrocketed 367%. After such a tremendous performance, any positive momentum would be encouraging. But Zoom posted solid double-digit growth.

Also noteworthy, the stock currently trades at 14.8 times sales, its cheapest valuation since Zoom went public in 2019. Put another way, Zoom is worth less on a relative basis than it was prior to the pandemic. Does that make sense? I certainly don't think so. That's why this stock looks like a bargain.