You can never be sure about which companies will end up producing world-beating growth in the coming years and decades. There are plenty of companies with exceptional growth potential, but turning that potential into reality is far from an easy task. Still, buying shares of companies with massive growth opportunities before them can pay off in a big way if things go right.
Three stocks that have jaw-dropping growth potential, and a good shot at realizing that potential, are Paycom Software (NYSE:PAYC), Impinj (NASDAQ:PI), and Shake Shack (NYSE:SHAK). Here's what you need to know.
Disrupting a boring industry
Back-office functions like payroll processing are a necessity for every business. ADP and Paychex are the two major players in the payroll processing industry, but Paycom is rapidly becoming a contender. Paycom offers a single human capital management application that encompasses payroll processing and a slew of other services, storing all data in a single database so each service always has the most recent information.
Paycom currently targets smaller businesses, those with between 50 and 2,000 employees, but larger businesses provide an additional growth opportunity. The company is extremely efficient when it comes to acquiring customers, with 42 sales teams located in 24 states at the end of 2016. Paycom provides a six-week training course for all new sales staff, and it can take up to 24 months for a sales office to reach maturity. When a new sales office is opened, a proven sales manager from an existing territory is put in charge.
The net result of this focus on having a well-trained sales staff is impressive profitability. Paycom is still small, with just $329 million of revenue in 2016, but it managed an operating margin of 17.6%. Many small software-as-a-service providers can only produce impressive growth by plowing money into sales, posting big losses in the process. Paycom is different.
Paycom grew revenue by 46% in 2016, and it has a long growth runway as it increases its payroll processing market share and adds additional services to its software. Winning larger customers will be difficult, since ripping out existing systems is more painful for larger companies. And the stock is far from cheap, valued at 12 times 2016 sales and 90 times 2016 earnings. But if you're looking for a stock with incredible growth potential, Paycom fits the bill.
Tracking billions of objects
IDC recently predicted that total spending on the Internet of Things will reach $800 billion this year and $1.4 trillion by 2021. This spending will go toward hardware, software, and services, spread across a wide variety of use cases, including various commercial applications as well as consumer applications like smart home technology.
One company set to benefit from this trend is Impinj, a provider of radio frequency identification chips and solutions. The company's chips, which cost just pennies each, allow objects to be tracked. Industries using this technology include retail, manufacturing, transportation, and healthcare. Impinj expects to ship as many as 8 billion RFID endpoints this year.
The potential for RFID technology is vast. In retail, Macy's expects 100% of its inventory to be RFID-tagged by the end of this year, allowing the company to increase inventory accuracy, reduce out of stock incidents, and better prevent theft. Globally, consumers purchase 80 billion new pieces of clothing each year. Add in everything else sold in stores, and the potential in retail alone could be hundreds of billions of RFID chips annually.
Impinj generated just $112 million of revenue in 2016, and the company has yet to produce meaningful profits. But as the cost per RFID chip continues to fall, the number of viable use cases grows. Shipping 8 billion RFID chips this year may look like child's play 10 years down the road.
Premium burgers and fries
Shake Shack, a chain of fast-casual restaurants started as a food cart in New York City in 2004, now has 71 domestic company-owned locations, as well as 56 licensed locations, mostly in international markets. Compared to fast-food chains with thousands of locations in the U.S. alone, Shake Shack is tiny.
The ceiling for Shake Shack's store count is lower than that of fast-food chains, given that the company's food is more expensive. Shake Shack set a goal of having 450 domestic company-owned restaurants in its IPO filing in 2015, more than six times its current store count. Beyond the U.S., licensed locations offer another growth opportunity.
Despite a steep slump in the stock price since peaking in mid-2015, shares of Shake Shack remain expensive. The stock trades for more than three times sales and over 80 times earnings. But you buy a stock like Shake Shack not because of its current results but for its potential. Revenue should steadily grow over the coming decades as the company expands its footprint, and margins could expand, especially given the company's premium pricing strategy. With so few locations today, Shake Shack has the potential to produce solid growth for years to come.
Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Paycom Software. The Motley Fool is short Shake Shack. The Motley Fool recommends Automatic Data Processing and Impinj. The Motley Fool has a disclosure policy.