Ultimately, investing in stocks is all about trading a cerain amount of cash for an uncertain (but hopefully higher) amount of it at some time in the future. Any gains you may get depend primarily on how fast the company behind the stock grows -- along with the market's sentiment -- between the time you buy and the time you sell. If a company grows fast enough in that time period, the impact of that growth can dwarf the impact of the market's sentiment, making high-growth stocks a particularly potent source of potential profit.
With that in mind, we asked three Motley Fool contributors to each select a stock with strong growth potential ahead of it. They picked Social Capital Hedosophia Holdings (NYSE:IPOA), iQiyi (NASDAQ:IQ), and Teladoc Health (NYSE:TDOC). Read on to learn why and to help yourself determine if any of them deserve a place in your portfolio.
From zero to $600 million at the speed of flight
Rich Smith (Social Capital Hedosophia Holdings): Precisely how much growth does it take to make a stock a "high-growth stock"? Would going from zero revenue to $600 million in annual sales qualify?
Because if it does, I think Social Capital Hedosophia Holdings just might be a stock to watch.
Admittedly, Social Capital Hedosophia Holdings isn't a household name, but perhaps you've heard of the company it's merging with: Virgin Galactic, soon to become "the world's first and only publicly traded commercial human spaceflight company"?
Yes, I thought that one might ring a bell.
Last week, Sir Richard Branson's space tourism company announced plans to take itself public through a merger with the Social Capital Hedosophia Holdings shell company, which is already publicly traded. When that happens sometime later this year, "Social Capital" will disappear, and only Virgin Galactic will remain.
According to Virgin Galactic, when this happens, the newly public company will carry an enterprise value of $1.5 billion, which will be worth "2.5x multiple of 2023 projected revenue." A bit of back-of-the-napkin math reveals that this means Virgin Galactic -- which has no revenue today and will only send its first paying passengers to space later this year, is expected to quickly soar to $600 million in annual revenue over the next five years.
How much will investors pay for such rapid revenue growth? I don't personally know -- but I'm very eager to find out.
A leader in China's video-streaming space
Keith Noonan (iQiyi): Subscriber declines for Netflix in North America might deter some investors from staking positions in growth-dependent streaming companies, but writing off the space entirely could prove to be a big mistake. A promising growth outlook in the Chinese streaming market and iQiyi's viable path to huge growth make it a stock with big return potential.
iQiyi now boasts over 100 million premium streaming subscribers (up from just 5 million in May 2015 and roughly 50 million subscribers at the beginning of 2018) and expects to see its subscriber count rise to somewhere in the neighborhood of 120 million before the year is out. Membership services revenue climbed an impressive 64% year over year in the first quarter and helped propel overall revenue up 43% compared to the prior-year period.
That said, the company faces some significant challenges that help explain why its stock price is trading down more than half from its lifetime high. Declining ad performance amid trade tensions and economic slowdown in China combined with high costs from technology investments and producing and licensing content help explain why iQiyi's stock has lost ground despite stellar membership growth.
The streaming-video stock climbed above $46 per share last year, but shares are currently trading in the $19 range. The company will have to weather a slowdown for the Chinese economy and fix aspects of its ad business that aren't working, but it stands a good chance of topping its previous high if it can continue adding premium subscribers, gradually hike prices, and take advantage of new technology and distribution opportunities.
Taking the pain out of routine doctor visits
Chuck Saletta (Teladoc Health): Most primary care doctor visits these days are for chronic illnesses. For many people, those chronic conditions will be with them for the rest of their lives, and most of the doctor visits can become fairly routine. For cases like that, virtual and/or remote doctor visits through Teladoc Health can be a win for the patients, a win for the doctors, and a win for the insurance companies.
Patients win because they can get the care they need without dealing with traffic and sitting in a germ-infested waiting room. Doctors win because they have less overhead costs to cover and they can see more patients in less time without having to disinfect themselves between visits. Insurance companies benefit because it's a lower cost operating model, and patients who find their visits easier to keep may be more compliant with their treatment plans, cutting down on more expensive problems.
Like many newer companies, Teladoc Health is dealing with some operational discipline issues that more established businesses may be able to better control. Despite those challenges, Teladoc Health remains the global leader in virtual healthcare. If it gets those issues ironed out and can then focus all of its energy on driving the business, Teladoc Health could truly become a high-growth stock that could soar. Its addressable market is simply that large.