It's been a little over six months since the first case of COVID-19 was confirmed in the U.S., and the economic disruption caused by the disease has been unprecedented. Many small businesses have had to close, millions of people have lost jobs or seen wage cuts, and the resulting recession and continuing lockdown measures have made it even more difficult for those businesses that are open. But despite it all, there have been some companies that are showing signs of resilience that indicate they will emerge from this crisis even stronger.
Etsy (ETSY -2.17%), Square (SQ -1.57%), and AppFolio (APPF -1.56%) have beaten the market soundly over the last six months and are building a solid foundation during this crisis to set the stage for a bright future. Let's look into why these three are top stocks that you can buy and hold for the next decade.
Stock returns over the last six months, through Aug. 11, 2020 versus the S&P500. ETSY data by YCharts
Etsy: Thriving in the face of challenging times
Etsy is an online marketplace where artisans can list their handcrafted goods for sale to millions of interested buyers. This business is especially resilient because over 90% of its sellers are a team of one working from home. With no warehouses, no supply chain, nor brick-and-mortar stores, this business is well shielded from coronavirus disruptions.
Additionally, its sellers have shown themselves to be adaptable to market needs. In the past quarter, 110,000 sellers stepped up to sell face masks, driving $346 million in sales. But it's not just masks that have been in demand. Etsy says it saw triple-digit year-over-year sales increases this past quarter of stay-at-home items like homewares and home furnishings (+128%), craft supplies (+138%), and beauty and personal care items (+187%). The growth in these categories helped drive incredible top-line results for the most recent quarter and has positioned the marketplace as a place to buy everyday supplies in addition to handicrafts.
Q2 gross merchandise sales (GMS) grew 147% year-over-year in the most recent quarter, which fueled revenue growth of 137% (including the company's Reverb acquisition). What's even more exciting is the expansion of its community during the quarter. Active buyers and sellers (those with at least one purchase or one sale in the last 12 months) increased 41% and 35% respectively year-over-year. This will likely fuel future growth, as customers stick with this marketplace once they've discovered it. In the quarter, there was a 51% increase in repeat buyers (those with two or more "purchase days" in the past year) and a 64% increase in "habitual" buyers having more than six purchase days in a year.
The company is innovating with artificial-intelligence-fueled search and augmented reality item display capabilities to make the buying experience even better. These are just a few ways it's helping to keep its online marketplace for special handcrafted items and everyday goods relevant for years to come.
Image source: Getty images.
Square: Benefiting from a diverse ecosystem
Square's recent headline results of a 64% year-over-year Q2 revenue increase driven by a 600% increase in bitcoin sales hide the full picture of what's going on with its business. Revenue from its seller segment declined 17% to $723 million, as small businesses faced recession-driven spending contraction. But its Cash App, which gives consumers bank-like services, such as deposits, debit card payments, person-to-person payments, bitcoin transactions, and stock purchases, was a bright spot in the quarter.
Excluding bitcoin, Cash App revenue was up an amazing 140% to $325 million on the back of 6 million new subscribers, increased product adoption, and usage increases. These gains drove an impressive $264 million in gross profit, up 156% from the previous year.
Bitcoin sales totaled $875 million in the quarter, but this is a low-margin business delivering only $17 million in gross profits. However, even though it doesn't contribute much to the bottom line, it helps to attract customers to Cash App. Without bitcoin revenue, the company's top line was flat year over year at $1.05 billion. This result isn't stellar, but the economy will eventually turn and when it does, Square's customers will get back to growth. Add in the growing popularity of its Cash App and the resilience of its diverse ecosystem, and investors would likely do well to buy and hold on to this stock for the next 10 years or more.
AppFolio: Providing essential services for property managers and legal firms
AppFolio provides cloud software that enables property managers and legal firms to run their businesses. It charges subscription fees, but makes 64% of its revenue from its Value+ transaction-based services such as marketing, payments, or tenant screening. You would think that a company that gets 90% of its revenue from the rental property business would be struggling now, but it's not. It turns out its software provides essential business operational features that are more critical than ever in our socially distanced world. Communicating with tenants, collecting rent, managing maintenance requests, or even renewing leases can all be done online with its platform, enabling property managers to remain effective and safe while working remotely. The essential nature of these services helped drive overall revenue up 27% overall year-over-year for Q2, powered by its Value+ segment growing 32%.
The company is innovating by adding a "virtual showings" feature and a streamlined online lease renewal process to make it easier to retain renters. It released a leasing dashboard for its high-end clients to summarize key metrics and reduce manual data collection. For its legal clients, it expanded the functionality of e-signatures to help with social distancing.
It's entirely possible that the rental property business will continue to slow as the pandemic drags on. But with a solid history of growth and impressive year-over-year customer additions of 9% for property management and 6% for legal in the most recent quarter, it's clear that AppFolio's products are critically important no matter what the economic environment. That should give investors confidence to buy and hold this stock for the next decade or more.
Looking ahead to 2030
Businesses are facing the most difficult economic conditions since the 2008/2009 financial crisis, with no end in sight. In spite of everything, these three companies have shown extraordinary resilience and are focused on improving the customer experience, which will put them on solid footing as the pandemic abates.
You would do well to buy one or all of these growth stocks and hold the shares for the next 10 years or longer.
