5 Most Listed Stocks To Buy Now – The Motley Fool

When a company has its IPO – or its initial public offering – it is the first time that ordinary investors have a chance to buy a tiny slice of the company. As I will discuss below, investing in IPOs is not suitable for everyone. Shares of newly listed companies can often skyrocket or reach dizzying levels during their first few months in the market.

Take Beyond the meat, for example. The company – which offers herbal meat substitutes that are increasingly popular in fast food chains – went public on May 2nd. Shares began trading at $ 25 each. Less than two months later, they were over $ 200. It's crazy – an investment of $ 15,000 was worth $ 120,000 in a few weeks. We will have to wait to see where the stock is going in the long run.

Of course, the early days are not always so rosy. Back when Facebook IPO in 2012, the shares lost more than 50% of their value in less than four months. It might have scared off the investors, which would have been a big mistake: equities yielded more than 1,000% over the next six years.

As you can see, stocks can be volatile as soon as they start trading. This may result in the holding of shares in a newly traded stock being put to the test. In fact, at The Motley Fool, we have spent a lot of time discussing investment risks on the first trading day: things can become so volatile that it's better to wait a few days or weeks before diving.

And I'm not a big fan of "big" purchases on newly traded stocks, either. These are companies that have limited operating history. Most people are just starting to break the tires. If you do not have a strong thesis to invest in stocks, if you have a set of measures to test your thesis and if you have the belief that things will be what they are, the action will not will not suit you.

But that does not mean that you should avoid recent stock market trades. That's where I can help. Below, I will deal with five publicly traded shares since January 1, 2017. For each of them, I will describe what the company does, why I believe it and how you can check if it is deliverable. .

Equally important, I have my own skin in the game: I own shares of the five companies.

Let's dive in!

Okta: Manage Identity in the Cloud

The cloud, or global network of servers connected to the Internet, stores more vital data than we could ever imagine. And the volume of these critical data, including your social security number, the results of health screening tests, and the confidential information of the company, will only increase. Secure access to this data is paramount, and that's where Okta comes in.

It is a Software-as-a-Service (SaaS) company that helps companies manage employees and customers with access to cloud-hosted data. As you can see below, the popularity of Okta offers is not in question, especially among customers willing to pay more than $ 100,000 a year.

It should be noted that the figures in this chart for 2019 only take into account the first three months of its fiscal year, which began on February 1st. Since 2015, the total number of customers has increased by 39% per year. More importantly – and impressively – the number of annual contracts over $ 100,000 has jumped 59% per year.

Okta has two larger and larger ditches that distinguish it from its competitors. The first comes from high "switching costs". When a company starts using a standard Okta tool, such as single sign-on or multifactor authentication, it relies on the service. Over time, customers begin to use more Okta tools to protect their data and allow employees and customers to access the data. In all, Okta offers 12 different products, although this number will certainly increase.

As customers add and use more Okta services, it becomes tedious to switch to an Okta competitor. This could not only be financially costly, but would also require new employee training and re-entry of data permissions across the system.

The best way to measure Okta's success to become more and more deeply embedded in the customers' DNA is to monitor the company's dollar-based retention rate (DBRR). This measures the total amount of income spent by a cohort of clients from one year to the next. By filtering the effect of new customers, we have an idea if customers stay at Okta (DBRR almost 100%) or add even more services (DBRR greater than 100%).

Here are the results so far.

Data Source: SEC filings. * DBRR for the last 12 months at the end of the first quarter of fiscal year 2019.

As if that were not enough, Okta also benefits from "network effects": each new additional user strengthens the service for existing users. Indeed, the company uses "progressive" profiling of users to ensure that users are what they claim to be.

This type of profiling requires artificial intelligence and machine learning (AI / ML). Elements such as AI and ML become much more powerful – and accurate – when they have more data to learn. Each additional client adds to Okta's superiority in progressive user profiling, a stylish way to say that the way Okta identifies users is constantly changing as it collects more data. This makes it much more difficult for the competition to catch up.

I believe that there is still plenty of room to grow. The company is now reporting $ 15 billion to investors, but thanks to double ditches and the huge migration of data to the cloud, I think we could go back in five years and look at the equities. today as a robbery.

Roku: More than you know

Roku is perhaps the only company on this list that most Americans know. The company sells a $ 30 USB plug-in that allows you to access all your streaming options from a single interface on your TV. If you have a Netflix account, use Amazon for video rental or streaming, like watching PBS with kids and go on YouTube when you're bored, you can do anything from the Roku interface.

In appearance, this does not seem to be a very good business to make money. But there is a lot going on behind the scenes. Apart from these USB sticks – or TVs sold with the Roku platform automatically installed – the company generates three other sources of revenue:

1. If a Roku user signs up for a new streaming service, Roku receives a small portion of that subscription.
2. Any purchases or movie rentals (such as an Amazon rental) made on Roku's platform contribute a bit to Roku's revenue.
3. If someone is looking at an ad-supported content with the help of Roku, the company gets an impression of every print announcement.

The second element of this list is probably the least significant. The first item on the list may also seem weak, but we're about to see how that might change. Roku is expected to reach 30 million customers by the end of 2019, and Disney should release its own streaming service later this year – available on Roku. If any of these 30 million subscribe to the Disney + service, this will show up in Roku's income statement, although the details do not allow to determine the extent of this reduction.

But by far the most important contributor is the income financed by advertising. If you watch YouTube or any other such service on Roku, every additional hour of listening is money for Roku.

Three key indicators will help investors to check if Roku is monetizing its growing user base: total accounts, hours spent continuously (remember, more hours usually means more ads) and an income average per account.

Data Source: SEC filings.

The most important thing to note here is the leverage that Roku derives from the transition to streaming. While the number of accounts receivable increased by 106% between the first quarter of 2017 and the first quarter of 2019, the number of hours elapsed has increased significantly: 170%.

There is no way to know how much of these billions of hours in streaming have been spent on channels funded by advertising. But even if they were not, Roku collects data on viewing habits that he can then use to offer more specifically targeted ads. These data are pure gold. Even if data is collected on users who do not look at the programs funded by advertising, they can also be compared with those who share similar viewing habits and look at programs funded by advertising, which increases targeting.

It may seem that Roku is in a precarious position in the value chain: it has relatively little content per se and simply serves as a place to access all of your content. But it's a powerful aggregator viewers. Streaming services know that by putting their services on Roku, they have instant access to 30 million viewers. No one else can offer that.

Such a length of time leads to effects on the network: the streaming services put their content on Roku for all users, and users choose Roku for all services – as well as for the single and economical payment of $ 30 of the platform.

Roku is still worth only $ 12 billion. With the massive switch to streaming and a powerful network-friendly aggregator position, I think Roku is a great investment at current prices.

MongoDB: Organize all types of data

If you have not noticed yet, one of the themes of all these recent IPOs is that of the data. It's everywhere and it's extremely valuable. It is essential to be able to store, search and analyze this data: companies that can do so capitalize on opportunities that competition did not even know existed.

For much of the past 20 years, this data has been organized in a system called "structured query language (SQL) databases". Clearly, this means that the data has been stored in columns and rows.

But now the data is a lot more complicated. It is found in documents, collections and many other media. MongoDB is the market leader in organizing, analyzing and searching these NoSQL databases (not just SQL).

The company debuted by offering free downloads of its technology. The upgrades have enabled users to access more tools facilitating the organization and use of data.

Then, in mid-2016, the company released MongoDB Atlas, a fully managed cloud database, available on all major cloud providers: Amazon Web Services. Alphabet Google Cloud Platform, and From Microsoft Azure.

In less than three years, Atlas already accounts for more than a third of the company's revenues. The growth has been simply staggering.

Incredibly, Atlas continues to grow more than 300% annually by the end of the first quarter of fiscal year 2020! Equally important, the number of annual six-digit contracts increased by 52% in one year to reach 598 at the end of April.

Like the other companies on this list, MongoDB is protected by several ditches. When companies start using MongoDB to store their data, switching costs become very high. No one wants the headaches of data migration or the risk of losing critical information. In addition, MongoDB can continually tinker with and add new products (such as Atlas) that are easily sold to existing customers.

It also benefits to a lesser extent from network effects. The more customers MongoDB has, the more data it has on how these products are used. The competition does not have this data and allows the company to innovate continuously and to offer new products.

I believe that the forces at play – and the growing importance of big data analysis – will make this stock a long-term winner.

Zuora: Billing is complicated in the subscriptions economy

With Zuora, we have the first company on the list that do not have impressed Wall Street with its results. Since their IPO last year, stocks have fallen by more than 20%.

Before explaining why this is the case, let's go back a bit. The founder and CEO of Zuora, Tien Tzuo, was formerly an executive of the original SaaS company, salesforce.com. He realized how powerful the business model of subscription was. It allows customers to maintain long-term relationships with businesses much deeper than a one-time purchase.

But while this differentiated business model was attractive, it had its own obstacles. One of them is the difficulty of changing a company's accounting practices to account for the products in an acceptable manner throughout the life of the contract. Believe it or not, this can create huge headaches in accounting services.

That's where Zuora's SaaS offering comes in. Customers use Zuora Billing or Zuora RevPro to handle these tasks and get a better insight into the direction their business is taking. All software complies with the Financial Accounting Standards Board rules, which resolves most issues.

As you can see, customers with annual contracts over $ 100,000 voted with their feet on the software.

And do not worry about this recent plateau: the 2019 figure in this chart represents only a quarter of the data. In the current state of affairs, the number of these large consumers has increased from 242 at the end of 2015 to 546 at the end of March 2019.

But not everything was easy. Revenue growth has slowed considerably, from 60% in the first quarter of the company as a public company to 22% today. However, I have written extensively about why this is a bit misleading: Subscription revenues are a major concern for long-term investors. The "service" revenue associated with creating customers is a very small margin and is only important to the extent that it adds a valuable service that locks customers. month

That said, even the growth in subscription revenues shows signs of sharp declines. This is where we need to examine how difficult Zuora's task is. MongoDB does not need to convince companies that data is important and Okta does not need to convince companies that security of identity is important.

This is not the case in Zuora. Companies are inherently conservative. Changing your business model completely to focus on a subscription model is not an easy sale. While it is possible that most businesses will adopt this format in the near future, this does not mean they are enthusiastic.

Zuora must do the evangelism itself. And according to the comments made during the last conference call with analysts, it seems that new members of the sales force are struggling to convince converts. These setbacks are an integral part of investing in companies that are changing the way we do business. Sometimes patience with the process is necessary. I think that's one of those cases.

For long-term investors, I still think it's worth spending a little capital – for example, 1% to 2% of your portfolio – on the company. The shares have already been reduced to nil and the company currently has a valuation of only $ 1.8 billion – by far the smallest company on this list.

Zuora 's dollar – based revenue retention rate of 110% shows that customers stay, so I think it' s worthwhile to own a small number of shares today. . As the transition to the underwriting economy gains momentum, shareholders will benefit greatly.

PagerDuty: real-time response to major issues

Finally, we have one of the most misnamed companies on the market so far: PagerDuty. The company was designed by founder and technology director Alex Solomon.

When Solomon was an engineer at Amazon, he realized that when bugs appeared in Amazon's code, employees were "paged" at any time of night to solve the problem. Often only one or two people really needed to be alerted, but he would only realize that after hours of trying to solve the problem.

With this knowledge, he launched PagerDuty in order to gather all the signals sent by the servers, to find a way to identify exactly where the problems were and to report only the persons who had to be notified.

Since then, the company's offers have multiplied: it now offers five different services. As you can see, they are very popular with customers willing to pay at least $ 100,000 a year.

But here is the big problem: we are still too early in the history of PagerDuty. The company was made public a few months ago. Existing customers quickly add new "seats" (read: permissions for employees to use a service) and services.

This has led to a net retention rate based on the dollar which is really remarkable.

Like other SaaS companies here, high switching costs and the network effect provide critical gaps. Unlike other companies, the network effect is particularly strong here. It can be very difficult to sift through all the signals that PagerDuty collects about the performance of an organization's online services. And once the problem is identified, it may take time to specify who to contact and how to resolve it.

The AI ​​and the ML of PagerDuty are essential to streamline these services. And because the company adds valuable customers, it also adds tons of data that AI and ML can feed on, improving performance as the system learns.

Basically, PagerDuty thinks it can offer a "weather report" for the Internet. In other words, it can monitor all data collected from all its customers and use it to accurately predict where and when service interruptions may occur. But as it is the only one to have access to the data, it is the only one who can offer such a service.

It is unclear when PagerDuty will have enough data to be able to offer such a report. The most important measure to monitor would be the number of clients with more than $ 100,000 in contracts. These are probably the ones that provide the most data. Even if such a goal "pie-in-the-sky" is set in more than ten years, it could be lucrative.

Imagine, if you want, that only one weather station in the world can offer accurate weather forecasts. It is not difficult to imagine the profitability of such a station. Fortunately for those of us who like to know the weather of tomorrow without paying an arm and a leg, measuring our atmosphere does not work that way.

Measure Internet, on the other hand, could. And by holding PagerDuty shares, I think we're taking advantage of this opportunity.

A last word on investment in newly-introduced companies

As I said at the beginning, I own these five companies in my own portfolio. But I never "backed up the truck" to buy a lot of stocks. IPOs are inherently volatile.

And SaaS stocks such as those highlighted here are very richly valued. Here's what I mean: the average S & P 500 company trades at about 2.2x sales. The five companies represented here sell on average just over 20 times their sales.

This makes sense: all small businesses are growing much faster than the more mature members of the S & P 500, so investors are willing to pay more for stocks as they expect more growth. supported. The SaaS business model also means that over time, sales are more profitable than traditional business models. But we are also in unknown waters with regard to such high valuations for whole areas.

For this reason, I bought small portions over time, adding stock when the progress of each company showed that my initial investment thesis was still valid. Today, these five people represent a relatively small share – 13% – of the money invested by my family.

There will be time to add stock – and benefit from price appreciation – in the future if I am right. If I am wrong and the stock falls, I will be happy to have left my exposure to these five players at a modest level.

I suggest you consider the same approach for buying such recent IPOs.