Young but well-seasoned emerging tech stocks are without a doubt the best bargain investment in America today, especially for people without a lot of money to put in play.
Technology companies that have been successful enough in their field to be brought public by a major investment bank, yet are young enough not to be well-known, present the ideal combination of overt riskiness and hidden strength to be misjudged by the majority of investors.
It’s this misjudgment that makes them relatively cheap, both in a nominal dollar sense as well as in a typical fundamental sense. Basically, market forces mismark young tech stocks at prices lower than they should be, given their prospects, and that presents a fantastic opportunity for smart investors who are willing both to put in the hours of research necessary to understand them and also take on the risk that they might be wrong.
If you are willing to be one of the elite corps of investors who will do the research and take the risk, then you will find this is one area of the market where you can start with next to nothing and build up a mountain of profits.
Let me give you three examples involving stocks that I recommended to readers over the past couple of years.
SHUTTERSTOCK
Shutterstock (SSTK) is a stock photo agency founded in 2003 in New York. The company hosts a library of royalty-free stock photos, vectors and illustrations available for download via a la carte or a subscription model.
Over the course of the ensuring decade, Shutterstock compiled more than 20 million images in its collection, and is searchable in nearly a dozen different languages around the world. It’s used by everyone from small groups looking for images for their monthly newsletter up to international companies for their website design. It has more than half a million paying customers in over 150 countries, and for the first time last year the firm surpassed $230 million in revenues, and $104 million in gross profit.
Shutterstock specializes in providing stock images at much lower prices than its older competitors such as Getty Images and Corbis. Knowing how much of an advantage that would be, and liking the fundamentals of the company, I recommended the stock at $24.70 on Nov. 1, 2012. The shares have since risen 316 percent to $102, and show no sign of slowing down.
Why? The global market for pre-shot commercial digital imagery is expected to exceed $6 billion annually this year, driven primarily by demand from businesses, marketing agencies and media organizations. The world is increasingly going digital, and with that is a growing need for images and pictures to fill these websites, blogs and digital storefronts.
Jon Oringer founded Shutterstock originally to sell his own images, but customer demand dictated he source images from other photographers. He remains chief executive and chairman of the board. Previous to founding the firm, he started several other businesses, where his frustrations with finding high-quality and cost-effective images drove his passion to start his own stock house.
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The revenue model is divided into two segments: subscription based and pay-as-you-go. The subscription model is what differentiated the firm from higher priced, more established competitors. For a little more than $200 a month, you can have access to 25 images per day, all royalty-free and licensed to be used in a number of ways, including billboards, business letterhead, websites, public areas, brochures, and anything else that falls within the industry standard licensing terms.
Shutterstock says subscriptions account for nearly 60% of total revenues. The company also recognizes that not every client will have a need for hundreds of images each year, so the pay-as-you-go offering provides on-demand purchase options for users with less consistent needs.
The company’s revenue is diversified and predictable, with no single customer accounting for more than 1 percent of revenues. Additionally, the last three years has seen customer retention grow as many of their former pay-as-you-go clients are upgrading to full subscriptions.
Meet Money and Markets’ new technology stock specialist,
JON MARKMAN!
Jon began his career as editor, investment columnist and investigative reporter at the Los Angeles Times. As news editor, his staffs won Pulitzer Prizes for spot-news reporting in 1992 and 1994.
In 1997, Microsoft recruited Jon to help launch MSN’s finance channel, where he served as Managing Editor. In that capacity, Markman became the co-inventor on two Microsoft patents.
From 2002 to 2005, Jon served as portfolio manager and senior investment strategist at a multi-strategy hedge fund.
Since 2005, Mr. Markman has specialized in helping everyday investors buy tomorrow’s technology superstars BEFORE they skyrocket.
Mr. Markman is the author of five best-selling books, including Reminiscences of a Stock Operator: Annotated Edition; New Day Trader’s Advantage, Swing Trading and Online Investing.
With the revenue model out of the way, the next two logical questions is how does it acquire the millions of images it hosts, and how much does it cost the company? Well, Shutterstock has over 35,000 approved contributors that make their images available in its library, with each contributor being compensated for each image that is downloaded. The company pays anywhere from $0.25 to $75 per image per download, with download prices increasing the more a contributor earns.
In addition to the overall industry growth in pre-shot digital imagery, the company has also managed to grow significantly from licensed video footage, and has expanded its offerings to include 1 billion royalty-free video clips.
The company went public Oct. 11, 2012, with a 4.5 million share offering priced at $17, and investors quickly pushed the price up to the mid-$20s. It was up about 10 percent post-IPO when I recommended the stock, and that turned out to be a great bargain. If you bought $3,000 worth of the stock then, you would have $9,480 now. It’s quite expensive now, but I like it on pullbacks.
ELLIE MAE
Unless you’re a mortgage professional, you’ve probably never heard of Ellie Mae (ELLI). But if the name sounds familiar, it’s because it’s a play on government-sponsored enterprises involved with home loans, Fannie Mae and Freddie Mac.
Ellie Mae, however, is an $862 million technology company that provides software solutions for the residential mortgage industry. I’m not sure why a company would want to associate itself with Fannie Mae, which just about blew up the world, but it is a catchy name.
The company operates the Ellie Mae Network, which is one of the largest electronic mortgage origination networks in the United States. Operational since 2000, it connects mortgage originators, bankers, brokers and service providers, helping automate much of the origination and funding of residential mortgages.
The Pleasanton, Calif., company was founded in 1997 and serves more than 4,000 customers and 50,000 users, representing more than 20 percent of total U.S. mortgage loan volume. Co-founders Sigmund Anderman founded several housing-related companies prior to Ellie Mae, while co-founder Limin Hu had more than two decades of experience in software and business development work.
Since the mortgage crisis of the past few years, I realized that there was an abundance of focus and increased scrutiny on the residential mortgage industry. As any homeowner can attest, the mortgage process was always quite laborious and paper-intensive, but now that lenders are required to generate even more disclosures and documentation, automating the process has become a top priority.
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I recommended the shares at $15 in mid-May 2012 because the company had proven itself capable of success after the IPO, the field was wide open and the fundamentals were rock solid.
The company’s solutions include electronic document management, customized partner websites, compliance management, income verification, and a number of other customizable add-on solutions. Ellie Mae estimates it is only servicing about 2.1 percent of a total $2.5 billion addressable market, indicating a huge opportunity to convert users not yet utilizing its products.
The flagship Encompass platform was the leader in the loan origination software sector, accounting for 40 percent of the market share by volume. Despite mortgage volume declines since 2009, the company was able to drive revenue growth of more than 47 percent as a result of multiple growth drivers targeted at over 7,500 mid-sized mortgage-generating units and nearly 110,000 industry professionals.
Additionally, Ellie Mae has a pricing solution that makes it attractive to large regional banks, as well as the local single-branch credit union. The majority of its new deals are software-as-a-service sales that are entirely Web-based with no large upfront software or equipment costs.
The services are offered as either a standard subscription or a success-based pricing solution. The latter option requires customers to pay only upon completion of a successfully closed mortgage loan with low monthly minimums, creating very little price opposition for smaller lenders.
This idea worked out quite well for readers, as the shares have risen 107 percent since, turning a $3,000 investment into $6,180.
NXP SEMICONDUCTOR
Even as the European economy goes from bad to almost as bad, life at most large and medium-sized companies goes on as usual — and innovation is continuing at a frantic pace.
One of the more interesting tech stocks to emerge on the continent in the past few years is NXP Semiconductors (NXPI), a spin-out from electronics giant Philips in the Netherlands. NXP sports a $5 billion market capitalization, has logged more than 11,000 issued and pending patents, and has 11 manufacturing sites worldwide.
The company’s chips are used in everything from automobiles and lighting to computers and televisions. It counts among its biggest customers Apple (AAPL), Delphi (DLPH), Samsung, Hewlett Packard (HPQ) and Bosch.
NXP was established as a separate unit in 2006, but because it’s a former division of Philips, the firm has more than 50 years of management experience under its belt. CEO Rick Clemmer has been at the helm since 2009. An industry veteran, he previously spearheaded the turnaround of Agere Systems (now a part of LSI (LSI)), which was spun out from Lucent Technologies. Of course, Lucent was also a spinout of Ma Bell in the U.S. many years ago.
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Despite being domiciled in the Netherlands, only about 3 percent of NXP’s revenue is generated in its host country. China, which generates 36 percent of sales, is the biggest revenue generator, followed by Germany at 12 percent, Singapore at 9 percent and the U.S. at 8 percent.
I recommended NXP Semi to readers on Sept. 17, 2012, about two years after its IPO, which is about the outer limits of the age range we consider in this strategy. At the time, the stock had doubled since its IPO, but had since faltered and was flat-lining. But I liked its positioning in the new versions of Android and iPhones, as well as cars, and sensed it would rev up soon.
The idea required some patience, as the shares were at the same price for us seven months later. But ultimately, sales and earnings caught fire as expected, and the stock has since risen more than 115 percent through a series of record highs.
The company is split into two major divisions: high performance mixed signal products and standard product solutions. Mixed signal circuits are integrated circuits that have both analog and digital circuits on a single chip.
These are typically high-level solutions and NXP meets client needs across eight functional application areas: automotive, identification, mobile, consumer, computing, wireless infrastructure, lighting and industrial. These chips are optimized and manufactured to meet specific performance, cost, size, energy usage and quality requirements of the applications for which they are designed.
Clients will engage NXP in the early stages of development, allowing the company’s engineers to fully understand the specific needs of each application. In addition to creating a partnership that helps cement NXP as their provider of choice, this also provides for a seamless extension into any future product updates and modifications.
The company holds the No. 1 or 2 market position in most of the areas in which it competes. It is the leading supplier for automobile radios and keyless entry systems, government identification systems and near-field communications, which is the fastest growing.
NXP’s huge patent portfolio is no surprise, as NXP spends more than $550 million per year on research and development, with 3,200 employees in 19 different locations dedicated to improving and creating new technologies.
Shares went public at $14, raising close to $500 million for the private equity consortium that participated in the buyout in 2006 from Phillips. At the time it represented the largest leveraged buyout in history for the semiconductor industry, at more than $8 billion.
I still like the prospects of NXP Semiconductor, and continue to recommend it on pullbacks. The purchase of $3,000 worth of the shares in November 2012 would be worth $6,510 now.
The bottom line is that tech stocks are very often mispriced in the early stages of their growth after going public, and this creates great potential for wealth-building by opportunistic investors. Shutterstock, Elli Mae and NXP Semiconductor were all great examples of this phenomenon, and there are more in the market every year if you know where to look.
Best wishes,
Jon Markman
P.S. Let’s talk tech stocks! Have you made money with a tech stock in the past year or so? If so, tell me about it! Simply click this link to jump over to the Money and Markets blog.