3 disruptive tech stocks that can overload your wallet

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Companies that disrupt the status quo can sometimes be stellar investments. Well-known disruptors like Netflix and Amazon has totally changed the way consumers watch movies at home and buy everyday products. If you had invested in this duo ten years ago (and held it), today you would have more than 40 times your original purchase.

But picking the winners from a multitude of mediocre players can be difficult. We asked three Motley Fool contributors to recommend a disruptive company that could deliver long-term market performance. They came with DataDog (NASDAQ: DDOG), Lemonade (NYSE: LMND), and Roku (NASDAQ: ROKU).

Image source: Getty Images.

DataDog: This Stock Could Be An Investor’s Best Friend

Brian Withers (DataDog): Datadog’s stock has rocketed, having more than doubled in the past 12 months. You might think you missed out on this fast growing stock, but this dog’s disturbance story still isn’t over. The company specializes in monitoring the ecosystem of applications, networks and security that businesses use to run their day-to-day operations and gain customers. Let’s see why you might want to add this observability expert to your portfolio.

First, let’s dive into the most recent results. Revenue increased 75% year over year. You might think the third quarter of the previous year was a weak quarter, but it shows solid growth of 61%, which makes the number even more impressive. But that’s not the only thing that sparked investor enthusiasm during the quarter. The company’s biggest customers continue to grow at a breakneck pace. This is further underscored with more than double its remaining performance obligations (RPOs). RPO is a key metric for software as a service companies and is the total value of all their contracts that have not yet been paid.

Metric

Q3 2020

Q2 2021

Q3 2021

Change (QOQ)

Change (YOY)

Returned

$ 155 million

$ 234 million

$ 270 million

15%

75%

> $ 100,000 of ARR customers

1,082

1,610

1,800

12%

66%

Remaining performance obligations

$ 316 million

$ 583 million

$ 719 million

23%

127%

Data source: publication of company results and call for results. QOQ = quarter to quarter. YOY = year after year.

But not all last quarter’s results are enthusiastic about all investors. The company announced many upgrades and additional tools at its DASH User and Developer Conference in late October. These improvements will help the company deliver more value to customers and encourage them to make more use of the product ecosystem. Today, 31% of customers use four or more products, up from 20% in the same quarter last year.

With more and more companies adopting more cloud services, this makes their IT infrastructure more complex. DataDog is becoming an essential essential tool for businesses to keep tabs on all of their digital assets. Despite the stock’s high valuation (price-to-sell ratio of 66), this disruptor is well positioned to beat the market over the next decade. You would be smart to pick up some stocks today.

Person using tablet drinking lemonade.

Image source: Getty Images.

Lemonade: the tech-driven insurer that could deliver full gains

Will healy (Lemonade): Lemonade is using technology to disrupt the insurance industry. Its tenant, homeowner, auto, animal and life insurance policies use artificial intelligence (AI) and behavioral economics to make coverage decisions. Through this process, he strives to get zero paperwork and “all snapshots”.

It also attempts to woo customers on a personalized level through the Lemonade Giveback program. If the company doesn’t spend all of the money set aside for claims, Lemonade donates to the charity of the customer’s choice. The program likely contributed to its Net Promoter Score of 70, well above the industry average of under 20.

Lemonade’s information advantage also gives it a competitive edge, with Lemonade Car emerging as its latest innovation in AI. It’s a technology tied to on-board sensors that tracks driver behavior, giving the company more information to assess the insured, meaning safer drivers will likely pay lower premiums.

Its approach continues to attract customers, bringing third quarter 2021 revenue to $ 36 million, up just over 100% from the third quarter of 2020. Revenue increased because that Lemonade increased its customer base by 45% year over year to just under 1.4 million. In addition, in the third quarter, it increased its premium per client to $ 254, up 26% from 12 months ago as the company sold more policies of a higher value.

Yet the business continues to burn money. Losses jumped 115% over the same period to $ 66 million, as spending growth slightly outpaced revenue. Plus, losses aren’t the only challenge. According to Ernst & Young, the loss ratio, or money spent to file claims, was 77%, above the industry average of 64%. Additionally, Lemonade stock struggled as it fell nearly 70% from its February high as short sellers saw the stock’s vulnerability deteriorated. Despite the decline, the current 32 P / S ratio is much more expensive than other insurance stocks.

Nevertheless, growth remains massive. Additionally, as it continues to attract clients with a technology and social good approach, the stock could increase over time as it transforms the way insurers sell policies.

Family watching a movie at home on a big screen TV.

Image source: Getty Images.

Roku: A Discounted Disruptor

Danny Vena (Roku): It’s been a tough few months for the Roku action. The company has been hit by a difficult double punch in the pandemic era and the continued disruption of the supply chain. As a result, the stock was crushed, dropping 49% from its recent highs. However, investors who can see past these short-term issues have the opportunity to own or add to one of the most disruptive companies of our time at a great price.

The disruption of cable television and broadcasting continues at an unprecedented rate. Pay-TV services lost more than 5 million subscribers in 2020 alone and are on track for even bigger losses this year, having lost more than 3 million paying customers in the first six months of 2021.

Streaming services are the biggest beneficiaries of these trends, and no single platform provides access to more paid and ad-supported video services than Roku. The platform offers over 10,000 streaming channels, providing niche programming options for every viewer.

Perhaps more importantly, the company derives the majority of its money from advertising, achieving a 30% reduction in ad space from channels that appear on its platform. This allows Roku to use its treasure trove of viewer data to ensure that targeted ads are placed in front of the right consumer.

I would be remiss if I did not mention the 800 pound gorilla in the room. In the third quarter, Roku’s active accounts grew only 23% year-over-year, while its streaming hours rose 21% – but those two numbers require context.

Roku’s active account grew 39% in 2020, while streaming hours increased 55%, fueled by blockages and stay-at-home orders. Yet even against its record performance last year, Roku continues to reach new heights, albeit at a (temporarily) slower pace.

Management attributed part of the slower growth of the company to the impact of the continued disruption of the global supply chain on television sales in the United States. The Roku operating system (OS) is present in 1 in 3 smart TVs sold in the country. Once the bottlenecks are resolved, account growth should resume.

Additionally, in the second and third quarters – which include the traditional summer vacation period – the growth in streaming hours slowed at a breakneck pace. This shouldn’t be too surprising given that many viewers have dropped their remotes and left the house for the first time since the start of the pandemic.

Every disruptive business faces a barrier on the way to greatness, and Roku is no different. It won’t be long before the company’s meteoric growth resumes, and investors who buy now will benefit from supercharged results.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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