Investing in 2020 has been quite the adventure -- and there's still 2-1/2 months to go before we close out the year. Thus far, we've witnessed a record-breaking tumble of 34% in the S&P 500 that took less than five weeks, as well as the fastest rebound in history to fresh highs from a bear market bottom.
While this volatility has been a gift for long-term investors, it's also proved quite the lure for short-term traders.
Online investing app Robinhood, which is known for offering commission-free trades, fractional-share investing, and free shares of random stock to new members, has been particularly adept at signing up these short-sighted traders, many of whom are young or novice investors.
On the one hand, it's excellent news that young people are putting their money to work in the stock market. After all, there's been no better wealth creator over the long haul than stocks. However, Robinhood has failed to provide these newer investors with the knowledge and tools they need to succeed over the long term. As a result, far too many of its members are left chasing so-called growth stocks that turn out to be awful companies.
Piling into growth stocks is a fantastic strategy for younger investors as long as they intend to hang onto them long term. Since millennials have time on their side, buying into innovative high-growth companies gives them their best chance to generate game-changing investment returns.
With this in mind, here are three growth stocks I consider to be must-owns for Robinhood investors.
Fintech stock Square (SQ 10.60%) is perhaps the most exciting stock in the entire market right now, and it isn't a company you'll have to twist arms to encourage young investors to buy. That's because Square's peer-to-peer payment platform Cash App caters to a younger audience to begin with.
Square's bread-and-butter business segment is its seller ecosystem. The company has been providing point-of-sale devices, loans, and analytics to businesses for almost a decade. Between 2012 and 2019, gross payment volume (GPV) on its platform grew from a mere $6.5 billion to $106.2 billion. Since Square's seller ecosystem is primarily driven by merchant fees, growing GPV and higher usage by medium and large businesses could really pump up fee collection.
But it's Cash App that'll be Square's knight in shining armor over the long run. We were already witnessing a push toward digital payments well before the coronavirus disease 2019 (COVID-19) pandemic hit. With cash now viewed as not only outdated but also as a harbinger of germs, the desire to go digital is even greater.
In a 30-month stretch between the end of 2017 and June 2020, Cash App's monthly active users more than quadrupled to 30 million. Additionally, 7 million users are now using Cash Card -- a traditional debit card that links to users' Cash App balance. Cash App allows Square to collect merchant fees via Cash Card. Square also uses it to reap transfer fees to and from Cash App and traditional bank accounts, as well as investment/exchange fees tied to bitcoin.
Square could well be the fastest-growing financial stock this decade, which makes it a must-own for young investors.
Though medical-device companies are constantly battling commoditization and competition, these aren't big concerns for DexCom, which is a leading global manufacturer of continuous glucose monitoring (CGM) systems. DexCom's CGM devices allow diabetic patients to monitor their blood glucose levels continuously without finger pricks. These devices help patients better control their blood glucose levels, and work hand in hand with an insulin pump.
Why DexCom? While I don't wish poor health on anyone, the fact is that there are 34.2 million diabetics in the U.S. alone (that's more than 10% of the U.S. population), with another 88 million people aged 18 and over showing signs of prediabetes. The number of people with diabetes is climbing, not falling, which suggests that DexCom's devices will find a growing audience in the years to come.
Best of all, DexCom is set up as a monthly subscription service. Subscription revenue is highly transparent and predictable; it's responsible for keeping DexCom's gross profit margin nicely above the 60% threshold.
Investors should expect DexCom's innovation and high-margin revenue stream to push sales up by close to 20% a year for the foreseeable future. That's growth young investors can appreciate.
A final must-own growth stock for Robinhood investors is cloud-native cybersecurity company CrowdStrike Holdings (CRWD 2.84%).
Cybersecurity companies are offering what's become a basic-need service. Hackers and robots don't take vacation days, nor do they care if the global economy is experiencing a recession. The coronavirus pandemic has pushed more businesses than ever into an online/cloud setting, and they'll rely more than ever on cybersecurity solution providers like CrowdStrike to protect their and their customers' data.
CrowdStrike's cloud-based Falcon platform has helped it stand out. Falcon is powered by artificial intelligence, growing smarter with each new CrowdStrike customer. Also, being cloud-native allows for seamless responses to threats at generally lower costs than in-office cloud protection.
Signing up new clients is great, and CrowdStrike has had no issue doing so over the past four years. Yet it's the spending growth of existing clients that's most impressive. In the first quarter of fiscal 2018, only 9% of its clients had at least four cloud module subscriptions. As of the second quarter of fiscal 2021, 57% of its clients had at least four cloud module subscriptions. CrowdStrike grows with its clients, with CrowdStrike's margins receiving their biggest boost from existing client add-ons.
Between fiscal 2020 and fiscal 2023, Wall Street expects the company to roughly triple sales, which makes it the perfect innovative tech stock for young and novice investors to buy.