Editor's Note: After this article was published, Luckin Coffee announced its Chief Operating Officer fraudulently misstated its financials. The cited numbers are no longer valid and will be restated in the future.
This is the best time to buy growth stocks: when the market is scared and investors are negative. The coronavirus pandemic has sent global markets into a tailspin. Share price multiples are shrinking across the board. And yet there's a possible disconnect here, between this macro pessimism and the optimism of individual companies. All three of these businesses are reporting skyrocketing revenue growth right now.
The first stock, Livongo Health (NASDAQ:LVGO), had revenue growth of 138% in its most recent quarter. And this is the slow company of the trio. Innovative Industrial Properties (NYSE:IIPR), the marijuana land baron, is getting dramatically bigger with sales running up 269% in the fourth quarter. But even that pales in comparison to the outstanding revenue jump of Luckin Coffee (NASDAQ:LK), which had sky-rocketing sales, up by 557% in the third quarter.
These three turbo-charged businesses are seeing their stocks flat (or down) in 2020. So let's take a deep dive to figure out which of these companies can continue to ramp up sales growth, even during this COVID-19 shutdown.
1. Livongo Health
Livongo Health is a software-as-a-service (SaaS) stock in the healthcare field and its revenue more than doubled in the most recent quarter. Livongo specializes in messaging subscribers who have chronic medical conditions like diabetes by sending them advice and analysis. Patients love it because the service is helpful, and it doesn't cost them anything. Health insurance companies pay for the service because Livongo keeps medical conditions from getting worse in patients (and becoming more expensive).
What's perhaps most exciting about Livongo right now is that its business faces almost zero risk from COVID-19. CEO Zane Burke was asked on the March conference call about how the coronavirus might affect its business going forward. He said, "We have a varied supply chain across the world, and we're prepared -- you may see in our balance sheet, overall, we had invested in inventory at the end of the year. And frankly, that was more of a hedge against the trade challenges that may -- that some of those that may be disrupted there. But we don't have -- we don't expect any challenges around that..."
Yet the stock was nonetheless hit by COVID-19 fears, dropping from $30 to $20 in a month. Of course, the whole market dropped in that time span, but in this case, the sell-off was highly irrational. COVID-19 will have almost zero effect on this business. When the market realizes that, the stock should resume its upward flight.
2. Innovative Industrial Properties
The coronavirus is having a dramatic effect on the marijuana industry, most of it bad. And indeed, Innovative Industrial Properties (IIP) is down about 30% off its highs. The stock has been highly volatile. It started the year at $77 a share, running up to $107 in February, crashing to $46 in March, and then running up again to $80 a share on Friday. That's a lot of price movement to end up pretty much where it started.
Innovative Industrial is arguably the strongest player in the marijuana sector. It's the dominant financier for much of the pot industry in the U.S. The real estate investment trust provides financing by purchasing marijuana farms and then leasing the land back to the original owner, the marijuana business. This sales-leaseback agreement provides the marijuana start-up with much-needed cash for its operations. Meanwhile, Innovative Industrial is the landlord sitting back collecting rent.
It's a sweet deal. The REIT has a near-monopoly in this business, as federal law forbids banks from loaning money to marijuana companies. And it's been hugely profitable for IIP. Usually, companies in hyper-growth are unprofitable as they try to reach scale. IIP, in stark contrast, has 52% profit margins. And this fast-grower pays a dividend that yields 5%. As a REIT, it's legally required to pay out 90% of its taxable income to shareholders.
While COVID-19 is bad for the marijuana industry overall, it's only bad for Innovative if the shutdown causes some of its tenants to miss rental payments. That could be a short-term hiccup, while Innovative Industrial finds new tenants.
On the positive side, this shutdown might actually increase the company's opportunities. Cash-strapped marijuana companies might really need Innovative to help with financing in this market. Indeed, IIP just paid $35 million for 373,000 square feet of marijuana greenhouses in Florida. The marijuana landlord now owns 3.8 million square feet of pot farms in the U.S. Six months ago, that number was 2.2 million. So the shutdown has actually been a boon to Innovative Industrial Properties.
3. Luckin Coffee
Hyper-growth coffee chain Luckin Coffee is a fantastic opportunity over the next several years. Coffee is relatively new to China. Starbucks has been making in-roads into the world's most populous country for a couple of decades now. But now Starbucks has a fast-growing competitor in Luckin.
Starbucks opened 4,200 coffee houses in China over a 20-year period. That's impressive, right? That's 200 stores opened every year. Now compare this sleepy giant to what Luckin has accomplished. The company was founded in Beijing in 2017; in under three years, the company has gone from zero coffee houses in China to 4,507.
That's amazing growth in a very short period of time. And the numbers are phenomenal. Luckin had $200 million in sales in the third quarter, up 557% year over year. And 30 million customers drank coffee at Luckin, up from 6 million a year ago.
The big unknown, of course, is what COVID-19 has done to sales. Starbucks has given us an update on its Chinese business; it's been awful in 2020. While the long-term story remains very bright for Luckin, investors should keep some cash on hand in case the shares belly-flop in the near term.