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2 Monster Stocks in the Making

By Jeremy Bowman - Oct 26, 2019 at 10:45AM

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Stitch Fix and The Trade Desk are two high-growth stocks you'll want to get to know.

Dividends are nice and value stocks can help you beat the market, but if you want life-changing returns from your investments, you have a lot better chance going after high-growth stocks -- the kind of stocks that can return 10, 20, or even 50 times your original investment, the way Amazon and Netflix have over the last generation. 

To find stocks like that, you need to look at disruptive businesses that offer optionality and have huge addressable markets that they can grow into. Two such stocks that fit the bill are Stitch Fix (SFIX 2.22%) and The Trade Desk (TTD 4.05%)

The view from the bottom of a forest of tall trees

Image source: Getty Images.

1. Stitch Fix: Redefining clothes shopping

Stitch Fix is changing the way people shop for clothes. The tech company's core service ships five items of clothing at a time to customers based on their style, budget, and size. The customer keeps what they want and returns the rest. Using data science and algorithms, Stitch Fix's stylists are guided by technology, and its selections get better as customers order more. Customers get supreme convenience -- they don't have to spend time searching for clothes online, visiting stores, or dealing with the hassle of returns -- and Stitch Fix gets reams of data that inform its buying decisions, its selections for other customers, and its own designs for its in-house brands. 

Stitch Fix competes with several other online styling services, most notably Nordstrom's Trunk Club, but the company is the clear leader in its subsector, and it's chasing a growing market opportunity worth an estimated $359 billion in 2018, according to Euromonitor.

The company is profitable and has been for several years. It's set a long-term goal of annual revenue growth of 20%-25%, and it has executed on that goal thus far, showing that it is steadily tackling the opportunity in front of it. Stitch Fix is now starting to branch out from its traditional offering with a new program called Shop Your Looks, which gives customers a highly curated selection of clothes based on their past choices, which they can purchase directly from the company through its website. By doing so, Stitch Fix is moving further into direct online retail, rather than just acting as a styling service, giving it an opportunity to capture greater wallet share from customers.

Stitch Fix is disrupting the clothing sector, has optionality with initiatives like Shop Your Looks, and has a huge addressable market to win from struggling brick-and-mortar apparel retailers. However, the biggest reason to believe that Stitch Fix could be a monster stock is that the market remains skeptical of the company. The stock has been highly volatile in the two years since its IPO, almost always swinging by double-digit percentages after earnings reports, and 54% of the float was sold short as of Sept. 29.

There are a number of reasons for the bearishness: Investors think the company will get railroaded by Amazon, they don't believe in the business, or they're suspicious of such services following the collapse of Blue Apron. But Stitch Fix's growth shows no signs of fading. The company is targeting 23%-25% growth, and just expanded into the U.K., its first entry into a foreign market. It may take time, but once the market becomes convinced of the opportunity here, the stock could explode. Investors got a taste of that last year when the stock nearly tripled in just a few short months. If the company continues to put up growth in the 25% range, the stock will eventually follow.

2. The Trade Desk: A new advertising boom

It's no secret that digital advertising has become big business. After all, Alphabet and Facebook have become two of the world's most valuable companies largely through the sale of online ads. While those two companies are highly profitable businesses, they have gotten too big to count on for blockbuster returns. To play the opportunity in online advertising, investors are better off going with a "picks-and-shovels" approach in the sector. They can get that with  Trade Desk, a company that provides ad buyers with a self-service, cloud-based platform to create and manage their ad campaigns across multiple digital channels.

Trade Desk is benefiting from several tailwinds. First, ad budgets are shifting to digital media as spending moves from traditional channels like print and television to mobile, social media, and online video. With the plethora of options available, ad campaigns are becoming harder to manage and more data-dependent. New technology should also give Trade Desk unforeseen opportunities for growth. One such emerging opportunity is Connected TV -- TV delivered over the internet -- which seems set for a boom, with a number of new services preparing to launch. In the latest earnings report, CEO Jeff Green said, "We are in the midst of the digitization and transformation of TV advertising, and we are uniquely positioned to help advertisers and TV content providers become more data-driven in everything they do." 

The company's cloud platform gives it scalability, or the ability to easily serve more customers as demand increases. But unlike many cloud-based companies, Trade Desk is profitable. Through the first half of the year, revenue jumped 42%, and the company's profitability is improving, now sitting at an impressive 24% net profit margin on an adjusted basis, showing that its model has some of the same benefits as online advertising at Google and Facebook.  

Trade Desk's monster potential combines the long tail of growth ahead of it with secular expansion in digital advertising, and a business model that will generate ample profits. As new technology like Connected TV goes mainstream, the company looks set to thrive, delivering more gains for investors.

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon, Facebook, Netflix, Stitch Fix, and The Trade Desk. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, Netflix, Stitch Fix, and The Trade Desk and recommends the following options: long January 2020 $60 calls on The Trade Desk and short January 2020 $125 calls on The Trade Desk. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Trade Desk Stock Quote
The Trade Desk
TTD
$74.49 (4.05%) $2.90
StitchFix Stock Quote
StitchFix
SFIX
$7.36 (2.22%) $0.16

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