Returns as of 11/21/2021
Returns as of 11/21/2021
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Companies that are disrupting the status quo can sometimes be stellar investments. Well-known disruptors like Netflix and Amazon totally changed the way consumers watch movies in their homes and shop for everyday goods. If you had invested in this duo a decade ago (and held), you’d have more than 40 times your original purchase today.
But picking the winners from a host of mediocre players can be tough. We asked three Motley Fool contributors to recommend one disruptive company that could provide long-term market-trouncing performance. They came up with DataDog (NASDAQ:DDOG), Lemonade (NYSE:LMND), and Roku (NASDAQ:ROKU).
Image source: Getty Images.
Brian Withers (DataDog): Datadog stock has been on a rocket ride, more than doubling over the past 12 months. You might think you’ve missed this fast-growing stock, but this dog’s disruption story is still not over. The company specializes in monitoring the ecosystem of applications, networks, and security businesses use to execute their day-to-day operations and win over customers. Let’s look at why you might want to add this observability expert to your portfolio.
First, let’s dive into the most recent results. The top line grew an astounding 75% year over year. You might think that the Q3 of the previous year was a quarter with a weak result, but it is lapping solid growth of 61%, which makes the number even more impressive. But this isn’t the only thing that investors were excited about in the quarter. The company’s largest customers continue to grow at a massive rate. This is further emphasized with the more than doubling of its remaining performance obligations (RPO). RPO is a key metric for software-as-a-service companies and is the total value of all its contracts that have yet to be paid out.
>$100K ARR customers
Remaining performance obligations
Data source: Company earnings release and earnings call. QOQ = quarter over quarter. YOY = year over year.
But last quarter’s results aren’t all investors are excited about. The company announced numerous upgrades and additional tools in its DASH user and developer conference at the end of October. These enhancements will help the company bring more value to customers and encourage them to use more of the ecosystem of products. Today, 31% of customers use four or more products, up from 20% the same quarter last year.
With more companies adopting more cloud services, it’s making their information technology infrastructure more complex. DataDog becomes a must-have critical enabler for businesses to keep tabs on all their digital assets. Despite the stock’s high valuation (a price-to-sales ratio of 66), this disruptor is well positioned to beat the market over the next decade. You would be smart to pick up a few shares today.
Image source: Getty Images.
Will Healy (Lemonade): Lemonade utilizes tech to bring disruption to the insurance industry. Its renters, homeowners, auto, pet, and life insurance policies use artificial intelligence (AI) and behavioral economics to make coverage decisions. Through this process, it strives for zero paperwork and “instant everything.”
It also attempts to appeal to customers on a personalized level through the Lemonade Giveback program. If the company does not spend all the money set aside for claims, Lemonade donates funds to the charity of the customer’s choice. The program likely contributed to its Net Promoter Score of 70, far above the industry average of less than 20.
Lemonade’s information edge also gives it a competitive advantage, with Lemonade Car emerging as its latest AI innovation. It is a technology tied to car-mounted sensors that tracks driver behavior, giving the company more information to evaluate the insured, meaning safer drivers will likely pay lower premiums.
Its approach continues to attract customers, taking revenue for the third quarter of 2021 to $36 million, up just over 100% compared with Q3 2020. Revenue rose because Lemonade increased its customer count 45% year over year to just under 1.4 million. Also, in Q3, it raised its premium per customer to $254, 26% higher than 12 months ago, as the company sold more higher-value policies.
Still, the company continues to burn cash. Losses surged 115% over the same period to $66 million as expense growth slightly surpassed that of revenue. Moreover, losses are not the only challenge. The loss ratio, or cash spent to present claims, came in at 77%, above the industry average of 64%, according to Ernst & Young. Also, Lemonade stock has struggled as it fell by almost 70% from its February high as short-sellers saw vulnerability in the beaten-down stock. Despite the drop, the current 32 P/S ratio is far more expensive than other insurance stocks.
Nonetheless, growth remains massive. Additionally, as it continues to draw customers with an approach driven by technology and social good, the stock could head higher over time as it transforms how insurers sell policies.
Image source: Getty Images.
Danny Vena (Roku): It’s been a tough few months for Roku stock. The company was hit by a one-two punch of difficult pandemic-era comps and the ongoing supply chain disruption. As a result, the stock has been crushed, falling 49% from its recent highs. However, investors who can see past these short-term problems have the chance to own or add to one of the most disruptive companies of our time at a bargain-basement price.
The disruption of cable and broadcast television is continuing at an unprecedented rate. Pay-TV services lost more than 5 million subscribers in 2020 alone, and are on track for even greater losses this year, having shed more than 3 million paying customers for the first six months of 2021.
Streaming services are the biggest beneficiary of these trends and no single platform provides access to more paid and ad-supported video services than Roku. The platform offers more than 10,000 streaming channels, providing niche programming options for every viewer.
Perhaps more importantly, the company makes the majority of its money from advertising, getting a 30% cut of the ad space from channels that appear on its platform. That allows Roku to use its treasure trove of viewer data to ensure targeted ads are placed in front of the right consumer.
I’d be remiss if I didn’t address the 800-pound gorilla in the room. In the third quarter, Roku’s active accounts grew by just 23% year over year, while its streaming hours climbed 21% — but both of those number require context.
Roku’s active account grew by 39% in 2020, while streaming hours surged 55% fueled by the lockdowns and stay-at-home orders. Yet, even against its record-high performance last year, Roku continues to reach new heights, albeit at a (temporarily) slower rate.
Management chalked up some of the company’s slowing growth on the impact of the ongoing global supply chain disruption on U.S. TV sales. The Roku Operating System (OS) is found in 1 in 3 smart TVs sold in the country. Once the bottlenecks have been addressed, account growth should resume.
Additionally, during the second and third quarters — which include the traditional summer vacation period — growth in streaming hours slowed to a crawl. This shouldn’t be too surprising considering that many viewers dropped their remotes and got out of the house for the first time since the pandemic began.
Every disruptive company hits a roadblock on its way to greatness, and Roku is no different. It won’t be long before the company’s stellar growth resumes, and investors who buy now will enjoy supercharged results.
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Stock Advisor launched in February of 2002. Returns as of 11/21/2021.
Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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