While sub-$20 stocks don't quite match the definition of penny stocks, their lower prices do start to classify them among the more volatile range of companies in the investing world. Ranging from newly public companies to more mature companies that have yet to hit their stride, this price point for stocks contains an eclectic group of companies.
However, three 2021 initial public offerings are getting some investor attention after being punished in the last few months due to the broader growth stock sell-off.
Let's take a closer look at Latch (LTCH +4.35%), Olo (OLO +0.00%), and SEMrush Holdings (SEMR 0.04%) and see why these three tech stocks priced under $20 a share are worth considering for smaller, speculative positions in a diverse, long-term-focused portfolio.
Image source: Getty Images.
1. Latch
Down over 60% in value over the last year, shares of Latch have struggled so far to unlock value for early investors in this provider of smart-lock, intercom, and thermostat technology.
OTC: LTCH
Key Data Points
Intending to revolutionize the way residents interact with their living spaces, Latch currently works primarily with North American apartments on new construction opportunities and retrofitted build-outs. After installing modernized, door-mounted access hardware in apartments, the company signs up the apartment owners or renters for its subscription-based LatchOS software, which ranges between $7 and $12 per apartment per month.
This software as a service (SaaS) business model gives Latch a new-age razor-and-blades operation of sorts, which sees the company forgo short-term profitability on the hardware it installs in favor of long-term cash flow from the services it provides for that hardware.
| Revenue Q3 2021 | Bookings Q3 2021 | |
|---|---|---|
| Hardware segment | $9 million | $39.9 million |
| Software segment | $2.2 million | $56.1 million |
Data from Latch Q3 2021 Earnings presentation.
As the table above shows, Latch is in the early stages of building out this SaaS business model, simply trying to get its hardware in as many buildings as possible, leading to higher relative hardware sales. However, when viewed through bookings, the company's software figures have begun to outpace hardware.
These software bookings are pivotal for the company and important for investors to pay attention to, as they have incredibly high 91% gross margins and represent a long-term path toward enduring free cash flow (FCF) generation. Meanwhile, Latch's cost of hardware sales is higher than its total hardware revenue, highlighting the company's ambitions to grow its customer base at any cost -- even at a short-term loss.
Thanks to this focus, Latch has already installed its hardware in one out of every 10 newly constructed North American apartments in 2020, helping it build its current cumulative booked home units to over 530,000.
As Latch reports earnings on Thursday, Feb. 24, these total home units will be of the utmost importance since these new hardware bookings may weigh on short-term profitability but bring valuable software cash generation over the coming decades.
2. Olo
Driven by its mission to "provide customers with better, faster, more personal service from the restaurants they love," Olo has its sights set on bringing restaurants into the modern digital era. However, after seeing its stock price rise as high as $45 per share, Olo (short for online ordering) has seen its share value plunge by over 50%, leaving it with a market capitalization, or company price tag, of under $3 billion.
NYSE: OLO
Key Data Points
Led by founder and CEO Noah Glass, who has an incredible 98% approval rating from his employees on Glassdoor, Olo boasts an impressive 4.6 out of a five-star rating from the website as well, indicating an influential culture. These metrics are of note to investors, as founder-led stocks with beloved company cultures have historically been incubators for some of the most impressive investing stories of our time.
Through its software as a service (SaaS) platform, Olo offers online ordering, delivery solutions, and even direct ordering through internet search results. Earning subscription revenue from its SaaS operations and transactional fees on restaurant sales, the company grew overall revenue by 36% year over year for the third quarter.
Best yet for investors, Olo has a dollar-based net retention (DBNR) rate above 120% in all three quarters of earnings as a publicly traded company. DBNR shows increased product usage from a company's existing base of customers, including customers lost to churn. Generally, anything above 100% shows growth within the company, making Olo's mark of 120% very encouraging for the long term.
Heading into earnings on Wednesday, Feb. 23, this DBNR will be vital to watch as Olo looks to balance new customer growth with existing customer expansion.
3. SEMrush Holdings
Much like Olo, online visibility expert SEMrush is another 2021 IPO that has struggled to get out of the gates, with its share price dropping over 50% from its 52-week highs. SEMrush is also a founder-led company, helmed by CEO Oleg Shchegolev, who has earned an impressive 96% approval rating on Glassdoor.
NYSE: SEMR
Key Data Points
Posting annualized revenue growth of 48% over the last four years, the company has built a leadership position in the marketing technology industry, bringing increased brand awareness to customers of all sizes. Similar to Olo, SEMrush owned a DBNR rate of 124% as of its most recent quarter, demonstrating that this revenue growth comes from both existing and new customers.
Best yet for investors, these sales come with impressive gross and FCF margins of 77% and 13%, respectively, as of the last quarter.
With a current global market opportunity estimated to be $13 billion, SEMrush's guidance for $183 million in sales for 2021 leaves a massive remaining growth runway for the company.
While the stock may trade at over 100 times FCF, its track record of 50%-plus sales growth and heavily discounted price make it an interesting prospect for a small portion of any tech investor's portfolio.
