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2 Stocks That Offer Explosive Potential Gains

By Parkev Tatevosian – May 21, 2020 at 11:56AM

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These two stocks could turbocharge your returns.

Stocks that offer explosive potential gains come with higher risk. That's because risk and return are two sides of the same coin -- you can't have one without the other. 

Still, there are times you want to take on additional risk in the hopes of a big return. This is especially true if you're young and have many years left until retirement. In this case, Tesla (TSLA -4.59%) and Uber (UBER -2.66%) might be great stocks if you're looking for a big gain. 

A big stack of hundred dollar bills.

Image Source: Getty Images.

Tesla

Over the past four years, Tesla's compounded annual revenue growth rate was 57%. The popularity of the Model 3 and the Model Y will likely help extend that growth.

Furthermore, sales of electric vehicles are expected to grow to 8.5 million units in 2025, up from the 1.7 million units expected in 2020, according to a report by BloombergNEF. With its industry-leading position, Tesla is poised to capitalize on this expansion. Admittedly, the competition will not remain idle. According to the report by BNEF, there will be over 500 EV models available globally by 2022. 

However, Tesla is far ahead with one feature customers consider important when switching from internal combustion cars to EV: range. The Model S, for example, provides 132 miles more range than its closest competitor as of April. That might be one reason why the demand for its cars is soaring. 

People bought just about every car Tesla could make in fiscal 2019. The company delivered 367,656 vehicles and produced 365,232. Therefore, until Tesla can manufacture enough cars to satiate consumers' appetites, production capacity and efficiency will be vital for growth and profitability.

Production for Tesla's cars continues to increase both at its Fremont facility and the Shanghai facility; combining the two sites' output, it can now build 600,000 Model 3 and Model Y cars annually. Compare that to the above figures the automaker delivered in 2019. The more affordable Models 3 and Y are expected to be Tesla's top sellers.

Moreover, the company is expanding production in Berlin. Adding capacity in Germany will allow Tesla to deliver cars more quickly and with less cost to its customers in Europe. The facility, therefore, has the potential to increase revenue and reduce costs.

Finally, being in a position of leadership in a rapidly growing market is often a recipe for explosive stock price increases. 

A red Tesla model S.

Tesla increases car production by 33%. Image Source: Tesla.

Uber 

Uber's Rides business was substantially lower in the most recent quarter because of the coronavirus outbreak. However, one bright spot was the company's Eats business, which experienced triple-digit growth. 

Despite the impact of cities, states, and countries imposing lockdowns on a large scale, Uber's Rides segment only experienced a gross-bookings decline of 3% year over year. What's more, because of the improvement of the "take rate" -- the share the company keeps from the gross booking -- Rides's adjusted net revenue increased by 6%.

Furthermore, the Eats segment increased gross bookings by 54% year over year, and adjusted net revenue was up by 124%. The food-delivery business offset some of the declines from Rides during the shutdowns as people ordered in more. Additionally, the take rate for Eats increased both year over year and quarter over quarter. It remains to be seen whether this elevated level of orders will be sustainable as restaurants reopen and people are allowed to dine in more often.

The success the Eats business experienced in the quarter could be one reason why Uber is potentially interested in acquiring one of its competitors. The company is trying to capitalize on that momentum with the potential acquisition of its competitor GrubHub. The consolidation could make the business more profitable in the long run as it removes a competitor and adds economies of scale for Uber.

Importantly, the Eats segment is still not profitable even on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, while the Rides segment is profitable on that basis. Therefore, even though food delivery is offsetting some lost revenue from Rides, it's not helping the company with profits just yet.

Overall, Uber is not profitable. In the most recent quarter, it reported a $1.26 billion loss from operations. On Feb. 6, CEO Dara Khorsrowshahi said, he expected the company to achieve EBITDA profitability in the fourth quarter of 2020. Now, with the impacts of the coronavirus, the company has pushed back that estimate by quarters, but not years. 

Admittedly, the near term may be a bumpy ride for investors. However, when you consider that Uber has 103 million monthly active customers, two fast-growing segments, and a path to profitability, the stock has  tremendous potential to speed up your gains. 

A view of a neighborhood from inside a car.

Uber Eats adjusted net revenue grew over 100%. Image Source: Getty Images.

What this means for investors 

Both Tesla and Uber have a large market opportunity in front of them, but they'll need to execute well on their plans to realize their ambitions. Both companies still pose substantial risks, as each ramps up its capabilities to serve more customers. But if they succeed, investors may stand to reap large rewards

Parkev Tatevosian owns shares of Uber Technologies. The Motley Fool owns shares of and recommends Tesla. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$275.33 (-4.59%) $-13.26
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
UBER
$27.82 (-2.66%) $0.76

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