These three small-cap companies have produced outstanding returns for investors in 2020, and each has a sub $10 billion market cap, which means there is typically a higher degree of risk and greater volatility. However, the attraction for investors is that smaller companies often grow quicker.
Lemonade (NYSE: LMND) is on a mission “to transform insurance from a necessary evil into a social good”. The insurance industry is centuries old and highly profitable but is often disliked and distrusted by the consumer. The insurance industry represents approximately 11% of GDP in the U.S. and $5 trillion worldwide, which means there is a vast market opportunity.
Insurance has been relatively untouched by technology and Lemonade plans to change that. By incorporating A.I. it plans to lower costs and as it scales the unit economics should improve. The use of A.I. enables policies to be taken out and claims to be made in a matter of minutes, which decreases friction. Its business operates by keeping a flat 25% of premiums while the remainder is used to pay claims and what is left is donated to charity.
In Q3, Lemonade reported better results than anticipated with in-force premiums growing by 99% year-over-year (YoY) to $188.9 million. Gross profit was $7.3 million, an increase of 83% YoY and its loss ratio decreased. The number of customers increased by 67% to 941,313, and the average premium was up 20%. The company is still unprofitable though, reporting a loss of $30.9 million.
Virgin Galactic (NYSE: SPCE) is the first publicly traded space tourism company going public through a reverse merger in 2019. The company was founded by Richard Branson and is gearing up to commence commercial service in 2021, provided the remaining test flights go to plan. Recently, on one of the first of three final test flights the mission had to be aborted due to the “onboard computer that monitors the rocket motor lost connection”. Provided it gets past this hurdle in the coming weeks, Branson should be set to go to space in Q1 2021.
So far, Virgin Galactic has $80 million in deposits from over 600 customers with a further 900 signed up on its “One Small Step” campaign. It estimates that there are over two million potential customers worldwide at the current price point of $200,000 – $250,000. It is likely that in the first few years of service it will be supply constrained, but aims after about four years to have a fleet of five spacecraft conducting over 400 flights per year per spaceport. This approach would be a multi-billion dollar opportunity annually. It has also signed agreements with NASA to develop a new private orbital astronaut readiness program which is another revenue generator.
Virgin Galactic is looking beyond space travel and has plans of disrupting the aviation industry with point-to-point hypersonic travel. It has teamed up with Rolls Royce to collaborate on a sustainable propulsion mechanism and has released an initial design concept. A flight between London and New York would take two hours.
Stitch Fix (NASDAQ: SFIX) is an online personal styling service that operates in the U.S and U.K. It was founded in 2011 and went public in 2017 with CEO Katrina Lake becoming the youngest woman in tech to take a company public.
Stitch Fix reported 10% revenue growth YoY in Q3, up to $490.4 million. It also reported better than expected guidance, anticipating to grow the top-line by 20-25% in fiscal 2021. Active clients grew by 10.2% to 3.8 million, and net income was $9.5 million. The stock rallied after Q3 results, likely due to a “short squeeze” but there is still upside potential.
The company initially revolved around its “fixes” where a box would be sent out for a subscription fee, however, has moved into direct buys as well. It has also expanded its offerings to men and children, which is also growing.
It operates its service using an algorithm and stylists to predict the clothes that fit its customers’ tastes. This algorithm separates Stitch Fix from its competitors as it is not just an apparel company. CEO Lake stated that “I would love to see a future where we’re talking about Stitch Fix as the personalization engine”. This may be the future for Stitch Fix and provided it can execute and continue to meet or beat forward guidance, it should provide market-beating returns.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above.
Contributing Writer at MyWallSt
Colm's favorite stock is Virgin Galactic as it is representative of his visions for our world in the future.