Summer is almost here, and the stock market has done well so far in 2019. But that doesn't mean everyone's confident about the future. Between trade war fears, a slowing global economy, and a host of company-specific risks, you can't afford to invest in just any company.
With that in mind, we asked some of The Motley Fool's leading contributors to suggest what stocks they like as spring gives way to warmer weather and school vacation. Below, you'll learn why they think Docusign (NASDAQ:DOCU), Green Dot (NYSE:GDOT), Twilio (NYSE:TWLO), Twitter (NYSE:TWTR), and Teladoc Health (NYSE:TDOC) are their favorites.
Disrupting an antiquated process
Brian Feroldi (DocuSign): The vast majority of business agreements made today are still completed using pen and paper. That's an amazing fact given that gathering signatures the old-fashioned way is slow, inefficient, and error-prone. DocuSign is on a mission to bring such agreements into the 21st century.
DocuSign sells cloud-based software that enables businesses to digitally prepare, execute, and act on agreements. The company's solution can be used to automate more than 70 types of agreements that could benefit from moving online. This includes things like vendor contracts, invoices, nondisclosure agreements, sales arrangements, legal contracts, and more.
There are numerous benefits to the adoption of e-signature arrangements. Using DocuSign's solutions greatly speeds up the process and provides a level of accuracy and transparency that traditional methods simply cannot, and the combination leads to lower costs. These benefits make it easy to understand why more than 477,000 businesses currently count themselves as paying customers.
DocuSign continues to produce numbers that prove that e-signatures are catching on with businesses of all sizes. Last quarter, the company's revenue grew 34% to just shy of $200 million. The company's gross margin clocked in at 74%, which is very high. The combination allowed the company to crank out free cash flow and produce adjusted profits.
However, is this level of growth sustainable? I believe the answer is yes. Management is currently guiding for revenue to land between $910 million and $915 million for the full year, the midpoint of which projects growth of about 30%. What's more, there's ample reason to believe that this is still just the tip of the iceberg. Management believes its current total addressable market is around $25 billion, so there's plenty of runway for growth ahead of this business.
One factor that should keep DocuSign's growth rate high is that it has done a great job building a product ecosystem that includes a who's-who list of partners. The company's products are directly connected to software that is built by Microsoft, Oracle, SAP, Apple, and more. More recently, the company struck up a new deal with Salesforce. These partnerships not only provide DocuSign with a strong competitive advantage, but they also greatly increase the company's commercial reach.
All told, there's a lot to like about DocuSign's business for the long term. While value investors might scoff at DocuSign's high valuation -- shares are trading for about 13.5 times sales and 148 times next year's earnings estimates -- I think DocuSign is such a high-quality business that the premium is worth paying.
A big discount for long-minded investors
Matt Frankel, CFP (Green Dot): Green Dot is one of my favorite fintech stocks, but it has taken a beating recently. The non-traditional banking company was down by about 20% in 2019 before reporting its first-quarter earnings, and some surprising revelations in the most recent earnings report caused the stock to drop even further. Investors can now get shares of Green Dot at their lowest price in almost two years.
I'll get to the reasons for the drop, but first, here's a bit about what Green Dot does, if you aren't familiar. The company has two major business segments. It offers its own banking products, most of which are designed for the underbanked portion of the population. These include things like prepaid cards and the GoBank checking account.
In addition, Green Dot also offers a banking-as-a-service, or BaaS, platform. In simple terms, many businesses would be well-served by offering some sort of banking product to their customers -- say, a branded debit card, a person-to-person payment app, or a quick way to pay people. However, it's often not desirable from a regulatory standpoint for these companies to actually become banks themselves, so Green Dot essentially uses their infrastructure to do it. To name one example, Green Dot's technology is behind Apple's Apple Cash person-to-person payment platform.
Green Dot's BaaS business has been extremely successful in recent years. In addition to Apple, Green Dot's BaaS customers include Intuit, Uber, Walmart, and Stash. So, why is the stock performing so poorly?
There were a few things in the company's recent earnings report that frightened investors. For one thing, Green Dot missed revenue estimates, and both revenue and earnings declined from a year ago. And more significantly, Green Dot announced an unexpected $60 million investment increase in its BaaS platform, which caused the company to significantly lower its guidance for the rest of the year. Green Dot doesn't expect to see the effects of its investment until 2020 and beyond.
To be fair, this does create a lot of near-term uncertainty in terms of execution risk. It also represents a significant pivot, with much more of the company's focus shifting to BaaS than its own products.
However, this could be a major positive catalyst for patient investors. Green Dot estimates that its $60 million investment could result in a million new accounts and $200 million to $300 million in revenue over time. So, while there's definitely more uncertainty, investors who are in it for the long haul may want to take a closer look at Green Dot at these depressed levels.
A stock any app user could appreciate
Dan Caplinger (Twilio): The mobile revolution has created a large number of new investment opportunities in the technology space, and there's been a host of upstart companies that have managed to carve out lucrative niches even against much larger competitors. Twilio is just such a company, with its focus on giving app developers the tools they need to make their apps as friendly to users and easy to navigate as possible.
Twilio specializes in integrating just about every aspect of communication into developer apps. If you want to be able to associate video into an app, then Twilio has a solution for you. The same goes for voice services to give app users another avenue for the customer service they want, and as texting has become a more common way for people to communicate not just in their personal lives but also with the businesses that serve them, Twilio has built in capabilities to let its clients manage those text communications effectively as well.
In terms of growth, Twilio has been extremely impressive. Not only has it managed to grow its revenue at a very high rate, but it's also managed to get its existing customers to build ever-deepening relationships with Twilio and its platforms. Developers have been excited enough about the platform the company has provided that they've worked to find innovations of their own, and sharing them across the Twilio user base has added value to the service as well.
Most recently, Twilio made a major acquisition that expanded its platform to incorporate the obvious final communication method: email. The purchase of SendGrid not only allowed Twilio to broaden its service offerings, but it also added SendGrid's extensive customer list, giving the acquirer a chance to cross-sell clients and produce instant growth.
Twilio felt the impact of SendGrid in its first-quarter financial results. Revenue jumped 81% from year-ago levels, with 60% organic growth combining with more than 20 percentage points of upward support from the acquisition to produce amazing top-line growth. The company also boosted its own already-impressive guidance for the full year, and it expects a modest profit on an adjusted basis.
Value investors won't like the fact that Twilio has climbed so far so quickly, having doubled in less than 12 months. Yet those who've waited for substantial pullbacks for the shares have largely been disappointed. With the market in somewhat of a swoon to end May, now looks like a good time to look more closely at Twilio and its prospects for future long-term growth.
Cozy up to this king of content
Todd Campbell (Twitter): Here's why I'm recommending Twitter in 140 characters or less: It's becoming the de facto source for political, financial, sports, and entertainment insight, and that's got its revenue and profit jumping.
In the summer of 2016, Twitter's shares were trading near all-time lows. Today, shares have more than doubled to nearly $40. Its success can't be attributed to any one thing, but it may not be coincidence that the bottom in its share price occurred roughly around the same time Donald Trump's presidency became more likely. Trump's affinity for tweeting is undeniable, and perhaps no single person has been as influential in turning Twitter into a must-use curator of news, discussion, and debate than him.
Twitter's success over the past few years has undeniably come with growing pains. But CEO Jack Dorsey (who, by the way, is also the CEO of another top stock, Square) has done a nice job balancing the need to provide a constructive platform for insight with monetizing eyeballs. His efforts to improve Twitter's reputation have caused a dip in monthly active users to 330 million from 336 million last year, but current users are more engaged than ever before.
In Q1, Twitter's monetizable daily active users (mDAU) increased 11% year over year, up from 9% in the fourth quarter. Over 134 million people now actively engage with tweets every day on applications that allow advertising. Importantly, management says it hasn't reached levels where ad demand exceeds ad supply, something fellow Fool Daniel Sparks recently pointed out. That's unlike Facebook, which has become more capacity-constrained over the years to avoid overloading users. Twitter also has more room to add new users than Facebook, which reported 1.5 billion daily active users in the first quarter.
The potential to sell more ads to more eyes is particularly encouraging given how profitable current demand already is for the company. Revenue rose 18% year over year to $787 million, and adjusted net income exceeded $67 million during the first quarter. That performance has industry watchers thinking revenue could grow to $3.5 billion this year from about $3 billion in 2018, and earnings could eclipse $1 per share.
Curating content in ways that boost engagement, regardless of whether the engagement begins in or outside of Twitter, is key to its ongoing success. Fortunately, Twitter has plenty of levers it can pull. Interest in politics, economics, sports, and entertainment can be local or global, depending on the user, and new machine-learning tools are already helping Twitter figure out how to better deliver content that excites users and engages them in conversations.
Ultimately, engagement isn't driven by any one single thing. But important events, such as the upcoming presidential election, can help. With more eyes watching and a growing reputation as "the" site for current events, I suspect advertisers will increasingly support Twitter in the coming two years, resulting in shareholder-friendly profits.
Riding a huge demographic wave
Keith Speights (Teladoc Health): If there's any sector that has demographic trends working in its favor, it's healthcare. Across the U.S., Europe, and Asia, aging populations are driving higher demand for healthcare services and will continue to do so even more in the future. As you might expect, this trend is also prompting government and private payers to look for ways to control skyrocketing healthcare costs. Telehealth can help achieve that goal. And Teladoc Health is the clear leader in telehealth.
Teladoc Health offers convenient virtual access to physicians around the clock. The company claims the most comprehensive telehealth solution, including general medical care, pediatrics, dermatology, lab testing, and behavioral health services.
It also has the broadest global reach in the industry, with operations in more than 125 countries. Actually, Teladoc Health stands as the only global virtual-care solution, and its global footprint is growing. The company recently announced that it's acquiring French telehealth provider MedecinDirect. It also launched Teladoc Telemedicine Services in Canada. This new initiative offers Canadians access to telehealth services across the country.
But customers find Teladoc's cost savings even more attractive than its scope of services. The company's ability to help control healthcare costs through virtual care is a big reason why around 40% of the Fortune 500 now use Teladoc Health for their employees.
Government-run health programs are also very interested in using Teladoc Health's services as a way to control rising healthcare costs. Teladoc Health CEO Jason Gorevic mentioned on the company's first-quarter conference call that the Centers for Medicare and Medicaid Services (CMS) "is very much behind the inclusion of telemedicine to increase accessibility to medical care and to lower costs." A new CMS ruling was favorable toward the use of telehealth services. Gorevic said Teladoc is "in active discussions with Medicare advantage plans" and should have more details on expanding into this big market later in 2019.
It's not surprising that Teladoc Health's revenue is soaring. In the first quarter, the company reported year-over-year revenue growth of 43%. Acquisitions fueled much of this growth, but Teladoc still saw 23% organic growth. Although the company isn't profitable yet, it should only be a matter of time before Teladoc generates solid earnings on a consistent basis.
I expect the company's strong growth to continue as the demand for telehealth services increases. And I view Teladoc Health as a great stock to buy to profit from the underlying aging demographic trends that are fueling this demand.