The technology-centric Nasdaq-100 index has been on a roller-coaster ride since November 2021. It dipped into bear market territory, losing more than 20% of its value before staging a fierce comeback over the last two weeks, bouncing 13% from its 2022 low point. Some individual tech stocks have swung even more violently, and as the volatility begins to settle, there appear to be some great opportunities among the wreckage.
Three Motley Fool contributors like Lemonade (LMND 0.83%), Riskified (RSKD -1.02%), and Latch (LTCH 15.66%). Their stock prices have all begun to head north alongside the Nasdaq-100, and over the long term, their unique business models can offer investors potentially market-beating returns.
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Changing the face of insurance
Anthony Di Pizio (Lemonade): Lemonade is literally changing the face of insurance. It's taking human operators out of the equation and replacing them with its web-based artificial intelligence (AI) bot, Maya. But investors haven't been kind to Lemonade stock amid the broader tech sell-off, sending it 76% lower since July 2021. The company's persistent financial losses are part of the concern, but they're an unfortunate reality on the path to what could be an enormous opportunity over the long term.
Maya, for instance, can offer an insurance quote to customers in as little as 90 seconds. And if you've ever tried to file a claim with your insurer, you probably know how frustrating that experience can be. But Maya can approve and even pay your claim in as little as three minutes. So far, Lemonade has attracted over 1.4 million customers and they've mostly been converts from the company's much larger competitors, which is a major vote of confidence.
After starting in basic categories like renters, homeowners, and pet insurance, Lemonade made the leap into car insurance last year. It's the company's largest market so far and it could be worth up to $316 billion in 2022 alone, so Lemonade had to acquire some help. It purchased AI-powered insurance broker MetroMile, and as part of the deal Lemonade received 10 years' worth of data plus 49 state insurance licenses, saving the company years of time -- and money.
Jumping into new markets is an expensive exercise, and Lemonade's $246 million loss in 2021 proves that. But as it continues to build scale, the financial picture should improve. It could take a few years, but Lemonade stock has already bounced back 62% from its 52-week low of $16.69, and one Wall Street firm, JMP Securities, thinks the stock could soar 250% from here to $95. So if you're a believer in AI reshaping the insurance business, Lemonade might be the bet to make for the long run.
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The potential to become a major winner
Jamie Louko (Riskified): 2021 was a record-breaking year in terms of companies coming public. According to Barron's, over 1,000 companies came public via initial public offering (IPO) in 2021, and this does not even include those that went public via special purpose acquisition companies (SPACs). Because of this, many investors might have skipped over smaller companies like Riskified, which went public in July 2021 and focuses on preventing fraud in e-commerce.
Riskified has developed an artificial intelligence engine that helps businesses prevent theft and payment failures, and it can even reduce friction that causes churn on an e-commerce platform. This can be difficult for businesses to build in-house, which is why Riskified had over $89 billion in gross merchandise volume run through its platform in 2021. In a study done by Riskified, the top 10 largest customers decreased their costs by an average of 39% while revenue increased 8% when using Riskified, and with just 1% customer churn in 2021, it is clear that the value for its customers is huge.
The company has had fluctuations in its gross margin, which are primarily caused by how accurate its artificial intelligence models are. If the Riskified's AI is wrong more often, the company will end up giving more to its customers in payouts. In the third quarter of 2021, Riskified saw a steep decline in its gross margin, dropping from 53% in the year-ago period to 46%. This was a major ding on the company, causing a drop in the stock price: As of this writing, shares of Riskified are down 75% from their IPO price.
That being said, the company made major improvements in its fourth quarter. Gross margin jumped back up to 53%, and while that still might be down from the year-ago period, this recovery signals that its AI might not have been as bad as investors previously thought.
Despite this good news, shares haven't moved much. The company trades at just four times sales -- a major bargain for a company with such high customer retention rates. A big concern was alleviated in the fourth quarter, and with shares still trading on the cheap, it could be a steal today and provide jaw-dropping returns over the long term.
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Modernizing the entry experience
Trevor Jennewine (Latch): Latch is a tech company that provides smart building solutions for commercial offices and apartment buildings. Its software-as-a-service product, LatchOS, powers a number of different devices, including door-mounted access controls, delivery assistants, intercoms, and cameras. Latch's ecosystem of products creates operational efficiencies for property managers and building staff, allowing them to control access permissions remotely. It also creates a premium experience for tenants and employees, enabling them to unlock doors and control smart home devices from a mobile app.
Latch's core advantage is its comprehensive approach to smart building technology. While the majority of rivals only make software or certain hardware products, Latch provides all of the hardware, software, and services clients need. And that value proposition has helped Latch earn a strong foothold in the apartment buildings vertical. In fact, over 30% of newly constructed apartments in the U.S. feature Latch technology.
That competitive edge translated into rapid growth in 2021. Latch saw cumulative booked home units -- a metric that measures the total number of units powered by its technology -- rise 94% to over 590,000. In turn, revenue skyrocketed 129% to $41.4 million. Unfortunately, the company's loss under generally accepted accounting principles (GAAP) widened last year, and it generated negative free cash flow (FCR) of $115 million. But in 2020, management forecast positive free cash flow by 2023. Regardless, investors should pay attention to this situation in the coming quarters. If Latch burns money more quickly than anticipated, or if it fails to generated positive FCF by 2023, the company may have to raise capital through debt.
Even if that happens, I think the future looks bright for Latch. The company puts its current total addressable market (TAM) at $54 billion in the U.S., but management has discussed expanding into Europe, which would boost its TAM to $144 billion. Either way, Latch has a massive market opportunity and a strong foothold in U.S. apartment buildings. And with the stock down 68% from its high, now looks like a good time to buy a few shares.
