This year has served as a not-so-subtle reminder that while the stock market tends to grow in value over long periods, it doesn’t move up in a straight line. Since the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite hit their respective all-time highs between mid-November and the first week of January, they’ve all plummeted into a bear market (i.e., a decline of at least 20% from recent highs).
On one hand, bear markets aren’t much fun. The volatility, unpredictability, and short-term unrealized losses associated with sizable market downswings can make investors question their desire to stick around. On the other hand, big declines in the stock market have always been a buying opportunity. Every single double-digit percentage decline in the major U.S. stock indexes has eventually been put into the rearview mirror by a bull market.
Bear markets are an especially smart time to buy beaten-down growth stocks. Companies that can sustain double-digit growth, while leaning on innovation and/or competitive advantages, often have the tools and intangibles necessary to make patient investors richer.
What follows are three monster growth stocks that have the capacity to turn a $200,000 initial investment into $1 million by 2032.
Teladoc Health
The first supercharged growth stock that’s been absolutely beaten down by the bear market but has a genuine opportunity to quintuple an initial investment of $200,000 over the next decade is telehealth services kingpin Teladoc Health (TDOC).
Skeptics have two issues with Teladoc. First, they’re worried about the company being nothing more than a COVID-19 pandemic fad. As people return to in-person doctor visits, there’s clear concern that Teladoc’s growth rate could slow.
The other issue is Teladoc’s (in hindsight) grossly overvalued $18.5 billion cash-and-stock acquisition of applied health signals company Livongo Health in 2020. Teladoc has taken two gargantuan writedowns in 2022 that are likely tied to this overpriced buyout. And yet, there are plenty of reasons for long-term investors to be excited.
For starters, Teladoc showed well before the pandemic that it wasn’t a fad. In the six years leading up the pandemic, the company grew its sales by an annual average of 74%. That’s not a fluke. It’s a sign that Teladoc is a pioneer in transforming how personalized care is administered. The company’s total visits growing from 4.14 million in 2019 to a midpoint estimate of just over 19 million in 2022 also shows how important virtual visits have become.
To build on this point, telehealth is a positive for the entire healthcare treatment chain. In instances where a virtual visit makes sense, it’s a far more convenient option for patients. Meanwhile, physicians can use telemedicine as a way to keep closer tabs on patients with chronic illnesses, which should lead to improved patient outcomes. This combination of improved outcomes, coupled with the generally lower costs associated with virtual visits, is bound to encourage health insurers to promote telehealth services.
Additionally, Teladoc Health should see benefits from its purchase of Livongo Health. Despite a number of unsightly one-time charges this year, Livongo is still in its early stages of growth, and it provides Teladoc with an avenue to cross-sell its services. A combination of cost synergies and cross-selling potential should allow Teladoc to sustain a double-digit growth rate throughout the decade and eventually push into the recurring-profit column. That makes it an intriguing buy for patient investors.
Bark
A second monster growth stock that can turn a $200,000 investment into a cool $1 million in 10 years is dog-focused products and services company Bark (BARK).
A quick look at Bark’s stock chart since going public via special purpose acquisition company in December 2020 would have most folks rolling over and begging for mercy. During bear markets, Wall Street becomes less tolerant of unproven companies with operating losses, which perfectly describes where Bark is now. But in spite of this skepticism, Bark has a number of catalysts in its sails.
On a macro basis, the U.S. pet industry is practically unstoppable. Data from the American Pet Products Association (APPA) shows that year-over-year spending on our furry, feathered, gilled, and scaled family members hasn’t declined in at least a quarter of a century. This means the dot-com bubble, Great Recession, and coronavirus pandemic weren’t enough to dissuade owners from spending more on the health and happiness of their pet.
To add to this point, the percentage of U.S. households that owns a pet has jumped to 70%, according to the 2021-2022 APPA National Pet Owners Survey. That’s up 14 percentage points from the very first APPA survey in 1988. More dogs owned equates to greater opportunity for Bark.
What really separates this company from most pet-focused retailers is its direct-to-consumer operating model. Although Bark’s products can be found in tens of thousands of retail doors, only 10% of quarterly sales derive from brick-and-mortar purchasing. The other 90% of Bark’s revenue originates from its nearly 2.28 million active subscriptions. Subscription revenue tends to be very predictable, and most importantly allows the company to keep a tight lid on inventory spending. The result is a superior gross margin that often hovers around 60%.
The other significant catalyst for Bark is the introduction of new services as a means to boost add-on sales. During the pandemic, it introduced Bark Home for commonly needed accessories such as beds, leashes and collars; Bark Bright for dental product needs; and Bark Eats, which develops breed-specific dry-food diets.
Bark should be able to sustain double-digit growth throughout the decade as well as achieve recurring profitability within the next two years.
Fiverr International
The third monster growth stock that can turn a $200,000 initial investment into $1 million by 2032 is online-services marketplace Fiverr International (FVRR).
To keep with the theme of this list, fast-paced companies with premium valuations have been clobbered by this bear market. Fiverr, which once had a triple-digit price-to-earnings ratio, can be purchased today for 30 times Wall Street’s forecast earnings for the upcoming year.
Skeptics are also worried about how rapidly rising interest rates could adversely impact the labor market. With the Federal Reserve seemingly doing everything it can to shift wage-bargaining power away from employees and back to employers, a freelance-driven platform like Fiverr could face some sizable bumps in the road.
While these headwinds shouldn’t be ignored, they’re not a threat to Fiverr’s two sizable competitive advantages.
The first difference between Fiverr and its peers is how freelancers present their scope of work on the platform. Whereas freelancers list their services on an hourly basis on other online-service marketplaces, Fiverr freelancers present their scopes of work as a packaged deal. This virtually removes cost uncertainty from the equation and has been a driving force that’s continued to push spend per buyer higher, even as the U.S. economy has weakened.
The other differentiating factor for Fiverr is what’s known as its take-rate: the amount of revenue Fiverr keeps of each deal negotiated on its platform. The company’s key competitors typically keep a low-to-mid teens percentage of the total value of deals on their respective platforms. Meanwhile, Fiverr has continued to boost its take-rate, which came in at a whopping 29.8% in the second quarter. As spending per buyer has increased, so has Fiverr’s ability to generate more revenue from each deal.
Lastly, consider the state of labor market in the wake of the COVID-19 pandemic. Although some workers have returned to the office, numerous data points have shown that work-from-home (WFH) and mobile work are here to stay. Platforms like Fiverr are well positioned to take advantage of this permanent shift in production.
Fiverr is already profitable on a recurring basis, and the company should continue to grow significantly more profitable over the next decade.
— Sean Williams
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Source: The Motley Fool