When it comes to investing in tech stocks, many investors wrongly focus on share price as a perceived indicator of a given company’s value.
But when taken in isolation, a stock’s per-share price is essentially meaningless. You should also consider metrics like market cap (the total value of a public company’s shares outstanding) relative to the size of a business’ total addressable market (TAM). Specific valuation multiples can also be useful to determine whether a given stock is “cheap” or “expensive,” such as price-to-sales (P/S) or price-to-earnings (P/E) ratios.
In any case, as someone who has spent over a decade writing about the stock market (and in the interest of delivering on the headline), here are three top tech stocks trading under $20 per share that I think are excellent values today.
A different breed of fintech
In his 2021 letter to shareholders, JPMorgan Chase CEO Jamie Dimon worried over the rising competitive threat of hundreds of digital-first neobanks and fintech companies that had already amassed tens of millions of accounts. He specifically said that these up-and-coming financial institutions don’t need to abide by many of the same regulatory requirements as traditional banks.
But SoFi Technologies (NASDAQ: SOFI) is a different breed of fintech in that it also went through the arduous process of obtaining its own national bank charter in early 2022. While this opens up SoFi to those cumbersome regulations Dimon wrote about, it also gives SoFi both an air of legitimacy among fintechs and key structural advantages over legacy banks.
SoFi added 717,000 new members last quarter alone, bringing its total to 6.9 million. That helped deposits swell 23% sequentially from the second to third quarters, to $15.7 billion. That not only provided the company with a lower-cost funding source for its fast-growing loan business, but also helped it maximize net interest margin by holding loans longer on its balance sheet (rather than securitizing them and selling them to third parties, as it was doing before the charter).
As I argued earlier this year, SoFi is also positioned to continue gaining market share regardless of whether interest rates increase or decrease.
CEO Anthony Noto has even set a goal of becoming a top-10 financial institution in the United States. SoFi has made significant progress so far, ranking as the 80th-largest U.S. bank in consolidated assets as of Sept. 30, up from 449th at the end of the first quarter of 2022, when it first received its bank charter.
If it reaches its top-10 goal, it would mean growing from its current sub-$10 billion market cap to the heights of fabled banks such as JPMorgan Chase, Citibank, Wells Fargo, and Goldman Sachs — and with a superior cost structure driving incredible operating leverage.
A nearly profitable insurance tech stock
Just as SoFi aims to become a top-10 U.S. financial institution, Lemonade (NYSE: LMND) wants to rival the world’s largest legacy insurance companies. Lemonade is an AI-driven, mobile-first insurance technology company that was founded in 2015 and went public in mid-2020 at the height of the pandemic.
Co-CEO Daniel Schreiber often muses that management is working on building an “enduring, iconic company” with a runway for growth that will last decades.
Such ambitions from early-stage tech companies often mean forsaking bottom-line profits in order to drive outsize revenue growth. But Lemonade is already making steady progress to that end.
Management told investors it now expects to turn cash-flow-positive by late 2025, well ahead of its previous target for reaching cash-flow-positivity by 2027. And, Schreiber said, it will be able to do so “with hundreds of millions in unrestricted cash in bank.”
Lemonade also provided guidance for adjusted earnings before interest, taxes, depreciation, and amortization to improve on a year-over-year basis each quarter in 2024, with the caveat that as an insurance company, it doesn’t expect the path to profitability to be entirely linear.
That means Lemonade’s share price will almost certainly be volatile over the next few years. But as it builds from its current base of over 2 million customers and a market cap of only $1.2 billion as of this writing, I think the long-term direction for the stock is up.
A leader in online visibility
Lastly, Semrush (NYSE: SEMR), a leader in online search engine optimization (SEO) tools, enjoys an exceptionally long growth runway.
Semrush’s bread-and-butter client segment is small and medium-size businesses (SMBs), and it has delivered solid results to that end in recent quarters despite recent macroeconomic uncertainty tightening the purse strings of many of those clients.
Third-quarter revenue grew a better-than-expected 20% year over year, to $78.7 million, spurred by a combination of a 14% increase in paying customers (to 106,800) and dollar-based net revenue retention of 109%. The latter is a strong indication of Semrush’s value proposition, indicating existing customers spent an average of 9% more on Semrush’s platform after their first year.
With an annual recurring revenue stream of nearly $323 million at the end of last quarter and a market cap of just $2 billion, I think Semrush has plenty of room to run as it pursues its total addressable market, already valued at an estimated $16 billion.
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Steve Symington has positions in Lemonade, Semrush, and SoFi Technologies and has the following options: long January 2024 $15 calls on SoFi Technologies. The Motley Fool has positions in and recommends Lemonade. The Motley Fool has a disclosure policy.
3 Top Tech Stocks Under $20 Per Share was originally published by The Motley Fool