Online loan marketplace LendingTree (TREE 9.43%) is what investors' dreams are made of. Though it's in a highly competitive industry, the company has found a niche as a middleman that funnels consumers to lenders. The result? Shares have rocketed by 1,740% since it went public in 2008.
While it's tough to find the next LendingTree with 1,700%+ return potential in less than a decade, we asked three of our Foolish contributors to give it a try. Rising to the top of the pack were fast-casual restaurant chain Shake Shack (SHAK 1.82%), online personal finance publisher Bankrate (RATE), and video game developer Activision Blizzard (ATVI 0.05%).
This stock offers up some tasty return potential
Sean Williams (Shake Shack): While it's going to be very difficult to follow in the footsteps of LendingTree, which has risen by more than 1,700% since its stock was listed publicly in 2008, I could see Shake Shack possibly following a similar path.
There are clear similarities between LendingTree and Shake Shack, even if they operate in completely different sectors. They both face a sea of competition, but they also bring something unique to the table. With LendingTree, it's lending convenience for the consumer, while for Shake Shack, it's higher-quality ingredients.
As investors have noticed, traditional fast-food places that haven't offered healthier choices on their menu and/or higher-quality products have struggled. Shake Shack's focus on higher-quality meats and locally grown ingredients is striking a chord with the consumer and allowing the company, which has a little more than 125 current stores in over a dozen states, to differentiate itself from the competition. Menu innovation has also been key, with the company attracting new customers with limited-time menu offerings, seasonal shakes, and the possibility of pre-ordering food at select locations.
Can Shake Shack's rapid growth continue? Based on its quarterly results and current balance sheet, I don't see any reason why not. The company has been able to use its operating cash flow to finance the opening and licensing of new stores. This means Shake Shack can continue to expand at a reasonable pace over the next five to 10 years (say, more than 10% sales growth per year, inclusive of new stores), or it could turn to debt-financed expansion if it really wants to ramp things up.
Considering the premium Chipotle Mexican Grill commanded during its expansion -- Chipotle's focus on locally grown ingredients is an interesting parallel to Shake Shack -- it's not out of the question that Shake Shack's stock could go higher over the next decade and follow in LendingTree's footsteps.
A forest of competition
Jordan Wathen (BankRate): LendingTree's success is remarkable given that it is effectively a middleman that generates revenue by referring would-be borrowers to banks and other lenders. Its closest competitor, BankRate, could reward shareholders handsomely if it can make even marginal improvements to its very similar business model.
BankRate competes in many of the same markets as LendingTree, but its process is very different. Whereas LendingTree's model is more involved -- consumer data is collected and sent to lenders to fulfill loan requests -- BankRate primarily operates as an advertising business with different "funnels" for each product line.
BankRate.com primarily directs visitors toward bank accounts and mortgages, CreditCards.com deals in cards, and its Living.com vertical focuses on the senior living segment. Recently, its card business has enjoyed rising revenue and profits, helped by increasing competition in the credit card industry.
The case for BankRate is that it is teetering on the cusp of profitability, so close that mere percentage-point improvements in margin would put it squarely in the black. Last year, the company reported a $6 million operating loss on $434 million of revenue, partially due to $43 million of non-cash impairments.
BankRate has some levers for improvement. Increased competition for deposits would be a boon for its namesake brand, BankRate.com, which has an undisputed lead in traditional savings, checking, and CD rate information. Likewise, its recent acquisition of NextAdvisor puts it in position to compete head to head with one of LendingTree's fastest-growing businesses, in which each company effectively arbitrages the difference between the cost of advertising and earnings generated from customer referrals to lenders.
While a turnaround at BankRate is far from guaranteed, shares trade at just 2.2 times sales, giving it substantial upside potential if it can eke out even modest margins going forward.
Keith Noonan (Activision Blizzard): Video game publisher Activision Blizzard has already posted impressive gains over the last five years, with shares gaining more than 400% over the stretch, but the company still has huge potential ahead. While video games have been on the pop culture scene since the 1970s, it's worth remembering that interactive entertainment is still a relatively new medium -- and one that's perhaps uniquely positioned to adapt to and benefit from the emergence of new technologies.
With the possibility of augmented and virtual reality tech going mainstream on the horizon, the potential exists for video games to evolve beyond the screen, and no third-party games publisher has a better stable of intellectual properties to bridge into new display mediums than Activision Blizzard. The company also looks primed to benefit from rapid growth in esports, with increasing interest in the competitive gaming scene pointing to low-cost advertising opportunities for its titles as well as the chance to sell advertising and generate revenues directly from viewers during broadcasts.
The popularity of franchises like Overwatch, World of Warcraft, and Call of Duty means that Activision Blizzard also has big opportunities with its recently formed consumer products division. So, the publisher has no shortage of high-growth momentum drivers thanks to emerging technologies and new ventures, but its core gaming business is also booming thanks to the marketability of its properties, strong global demand, and digitally delivered content sales that are doing great things for the company's top and bottom lines.
Even trading at 30 times forward earnings estimates, Activision Blizzard has plenty of room to run.