If you peruse the list of stocks that have doubled over the last few months, you'll find it littered with speculative investments fueled by short-term growth drivers. But some stocks are soaring higher because the business trends and long-term outlook warrant improving investor sentiment.
1. Carvana: Up 160%
Carvana was a company needing an impetus for the adoption of used-car e-commerce, and it got one in the coronavirus. According to a survey by CarGurus, only 32% of people previously thought buying a car online was a good idea. Because of the pandemic, a whopping 61% are receptive to it now. "Suddenly, buying cars online is becoming normalized," said Carvana CEO Ernie Garcia III in the second-quarter earnings call.
In Q2 -- covering April through the end of June -- Carvana grew revenue 13% year over year, but vehicle sales were up a more robust 25%. This disparity is due to the average sales price per vehicle falling from last year, as the coronavirus disrupted inventory management. The company temporarily stopped buying cars from customers during the quarter as it assessed COVID-19's impact on its business.
If Carvana had had more inventory, then it likely would have sold even more cars in Q2 -- there would have been more options to choose from. This short-term constraint on the business will soon be fixed. In fact, the company bought as many cars from customers as it sold to customers in July, its long-term buying goal.
Over the last four quarters, Carvana has sold 204,000 vehicles, but its long-term goal is over 2 million annually. So there's plenty of growth opportunity, and it seems more attainable now with the accelerated adoption of used-car e-commerce.
However, investors hoping for profits will need to be very patient. In Q2, its net profit margin was negative 9.5%, trailing the negative 9.3% it posted for full-year 2019. That said, its margin has improved every year it's been in business and it should rebound in the back half of 2020 as inventory returns to normal. But even steady progress likely means profits are years away.
2. Digital Turbine: Up 370%
If a company has a smartphone app, it obviously wants it to be downloaded. The company can advertise, but it's highly competitive and earning a download isn't easy. That's what Digital Turbine is for. Through its range of services, it aims to get apps on users' phones, and it also helps improve advertising.
Digital Turbine is doing quite well at this. For Q1 of fiscal 2021, the company's software was downloaded on 43 million new devices, about 10% of its all-time cumulative downloads -- impressive for just a single quarter. Why would everyday people download the software on their phones? They likely aren't even aware of it. Digital Turbine has partnerships across the smartphone manufacturer and telecom industries, and its software is often embedded in the phone's operating system.
In the first quarter, Digital Turbine's revenue soared 93% year over year to $59 million. This led to incredible stock gains. However, most of this growth came via the company's acquisition of Mobile Posse. Excluding this, revenue was up a less impressive 28%.
Still, Digital Turbine is growing, profitable ($10 million in Q1 net income), and trades at a forward price-to-sales ratio of 9. I don't find the valuation excessive given the opportunity. Its business enjoys stability since its software is native to operating systems, and could surge with a smartphone upgrade cycle. Furthermore, the company is branching out into connected TV. So it could find itself on more devices in short order, especially considering its existing partnerships.
3. StoneCo: Up 97%
Brazil is a market ripe for disruption from e-commerce and e-payments, and StoneCo is seizing the opportunity. After initially freezing expansion efforts in anticipation of the COVID-19 economic fallout, the company has already returned to growth. The second quarter of 2020 showed gains in more metrics than can be covered here, but they're evident in a quick glance at the Q2 slideshow presentation provided by management.
The Brazilian government provided its version of coronavirus stimulus checks, and StoneCo was a partner to get these into the hands of the people. While it provided little profit, it was another opportunity to drive adoption among consumers. For example, online total payment volume (TPV) was up 764% year over year in July alone. This includes government stimulus. But even without stimulus, online TPV was up 94%. Clearly, Brazil's war on cash is heating up.
Also in StoneCo's favor: It has a disciplined management team that's interested in both revenue growth and profitability. Consider even with the unprecedented COVID-19 challenge, the company has earned 282 million reals so far in 2020, or about $50 million. It's also been free-cash-flow positive over this time, albeit just barely.
Of these three companies, I like StoneCo best. Carvana is disrupting the used-car industry and has a great opportunity, but its valuation is creeping higher and it's still too far from profitability for my liking. Digital Turbine is also excelling in 2020, but I'm not sure how big the market opportunity is long-term.
I'm not knocking either Carvana or Digital Turbine. To the contrary, I believe their gains thus far are warranted. However, going forward I like StoneCo stock better for its balance between risk and reward. The responsible use of capital by management has the company both growing and profitable, mitigating risk. And with cashless transactions enjoying accelerated adoption in an underserved (but massive) economy, I believe this fintech stock can reward shareholders from here.