One of the tried and true methods of investing in the stock market is to latch onto the leaders in emerging industries and hang on for the ride. However, as these businesses begin to mature, some of that momentum eventually fades, while up-and-coming businesses find different paths to success, becoming the next generation of high-growth stocks in the process.
Assuming you have sufficient reserves set aside for emergencies and $3,000 (or less) that you don't expect to need in the coming three to five years, here are three companies that represent the next generation of success in their respective industries and have the potential to be the stock market leaders of tomorrow.
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1. Roku: The best investment in streaming?
There's little doubt that Netflix (NFLX 0.91%) was a brilliant stock investment, returning 37,660% since 2002. After disrupting video stores with its DVD-by-mail service, the company engineered the shift to streaming video, amassing 183 million subscribers worldwide, with more joining every day. That said, it's unlikely the stocks heady gains will continue, as growth on the platform has already begun to slow, and the competition is growing at a feverish pace.
Another way to play this paradigm shift to streaming video is Roku (ROKU +2.26%). The pioneer of streaming devices hosts an agnostic platform that includes paid subscription and ad-supported services alike, and it has found a way to make money from them all.
Each time a user signs up for Netflix or some other paid service, Roku gets a commission. For the ad-supported services on its platform, the company gets a cut of any of the advertising viewed by its users. The Roku operating system (OS) -- which powers a growing number of smart TVs -- was found in one-in-three smart TVs sold in the U.S. last year, its secret weapon for expanding its user base.
By supporting all comers, Roku is growing by leaps and bounds. In the first quarter, active accounts grew by 37% year over year, while streaming hours increased 49%, to 13.2 billion. The average revenue per user continues to climb, up 28% over the trailing 12-month period to $24.35. Revenue grew 55% year over year, but even that doesn't tell the whole story. Platform revenue, which includes The Roku Channel, advertising, and licensing of the Roku OS, which accounts for the lion's share of the company's revenue, grew even faster, up 73%.
While Netflix's growth may be slowing, Roku is just getting started.
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2. The Trade Desk: The fastest-growing corner of digital advertising
Alphabet's (GOOGL +0.66%) (GOOG +0.41%) Google is synonymous with digital advertising and has also provided investors with enviable returns, up 2,660% since its market debut in 2004. The search giant was one of the first to understand the power of digital ads and still makes the majority of its sales from Google advertising -- accounting for a whopping 82% of revenue. Yet, even after a boost from its high-growth, cloud-computing segment, revenue growth is slowing, up 13% year over year in the first quarter.
The Trade Desk (TTD 2.15%) offers investors another way to benefit from the ongoing shift to digital advertising. The company works with many of the top ad agencies and operates in a corner of the digital ad market known as programmatic advertising. The Trade Desk uses high-speed computers and cutting-edge algorithms to make real-time, data-driven decisions that place ads in front of the consumers most likely to act on them. The company has also turned some of the ad industries outdated practices on their head. The Trade Desk gives ad buyers a detailed breakdown of what consumers are buying and how much they're paying for it -- including the markup -- providing a level of transparency that was practically non-existent in the industry.
By conducting business outside the walled gardens operated by Google and Facebook, and using its transparent, upfront pricing model, The Trade Desk has become one of the fastest-growing players in a crowded and competitive space. In the first quarter -- and in spite of the pandemic -- revenue grew 33% year over year, even more impressive when compared with the 4% growth of the overall industry.
Several of the company's biggest growth drivers delivered more impressive performances. Its connected TV revenue grew 100%, while mobile video grew 74%. Audio and mobile in-app grew 60% and 55%, respectively. Additionally, customer retention shined, remained above 95%, something its done every quarter going back five years.
Google's growth will no doubt decelerate from here, but the sky's the limit for The Trade Desk.
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3. Shopify: A better way to profit from e-commerce
Amazon.com (AMZN +0.55%) is yet another example of a business that revolutionized an industry. The company went from an online bookseller to the leading e-commerce retailer in the world in a matter of years. Early investors have profited handsomely, with the stock running up 123,800% since 1997. Unfortunately, those high-growth days are in the rearview mirror. Even with stay-at-home orders and growing e-commerce adoption as tailwinds, net sales in the first quarter grew 26% year over year, up from 21% growth, sequentially.
While this slowing was inevitable, there's a high-growth way to play the continued adoption of e-commerce by going to the platform that empowers merchants of all sizes to embark on the digital sales journey: Shopify (SHOP 1.37%).
E-commerce has grown from about 4% of retail sales in the U.S. a decade ago to more than 11% in the fourth quarter, and that number continues to climb. Shopify provides sellers of all kinds with the tools necessary to build and maintain an online website, process payments, arrange shipping and logistics, track inventory, and even provides working capital loans. The company's services now support more than 1 million merchants worldwide.
By providing all the resources necessary to make the move to online selling, Shopify is empowering the next generation of entrepreneurs to succeed -- and in so doing has been extremely successful itself. In the first quarter, Shopify's revenue grew 47% year over year, while subscription revenue grew 34% and now represents 40% of total revenue.
While Shopify has merchants in 175 countries worldwide, the majority of those are located in North America. This gives the company a vast global opportunity to tap into going forward.
Amazon may end up being the biggest e-commerce platform, but Shopify will provide the next generation of online sellers with the tools they need to succeed.
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Epilogue
There's no doubt some investors will ask, "Why now?" The prevailing wisdom is that the worst may be yet to come, with a recession no doubt already underway, and the world has yet to get a handle on the pandemic.
While that is no doubt true, the stock market is forward-looking. Many investors fled their investments in the early days of the pandemic, only to miss out on the fastest bear-market recovery in history. Each of the major indices -- after having plummeted 30% or more -- have each climbed more than 30% since the bottom and regained more than half their losses, leaving skittish investors on the sidelines wondering where they went wrong.
There's always the potential that the market could fall anew, but without a crystal ball, there's no way to know for sure. Those who fear further declines have the option to employ the time-tested strategy of investing some funds now and buying more stocks later. That way, if there are additional declines, they will average into stocks at lower prices.
