It's easy to look at a penny stock and be tempted. After all, you can buy a whole lot of shares when a stock trades for less than $5. And with just a $1 share-price increase, it could be a big winner. That's tempting. It's also dangerous.
Stocks trading with such low share prices are usually cheap for a reason, and it's not a good one. Buying hundreds of shares might feel like a bargain, but it's important to remember that the number of shares isn't what matters. Your total investment is the number to focus on. Think of it this way: A 10% increase on a $1,000 investment means a $100 gain. Whether you own 1,000 shares or half a share, it's still a $100 gain.
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So, let's take a look at three companies far from the ranks of penny stocks -- and for good reason: They are growing like gangbusters. Better yet, you can afford them, even if you only have a small amount of money to invest. These days, you can buy fractional shares with commission-free trades. Check out The Ascent for a list of the best brokers who offer that.
1. Amazon
I know, I know. You were thinking penny stocks, and this company trades at more than $3,100 per share! Hear me out (and remember that you can buy fractional shares if needed).
Amazon vs. S&P 500 performance, data by YCharts.
Amazon (AMZN -2.56%) has crushed the market for years and is up more than 70% this year. That's a remarkable gain for a company already so large (it had a $1.6 trillion market capitalization as of Nov. 30). While Amazon's biggest growth days are behind it, the company's dominant position in e-commerce is unquestioned.
The company reported having 150 million Amazon Prime members in January. That number undoubtedly has grown during this year of COVID-19 stay-at-home orders. Customers like Prime because of its quick delivery, and Prime Video has become a greater value-add as people look for home entertainment. Investors like Prime because it's a strong source of recurring revenue. It could get even stronger if the company raises the price of a subscription.
On top of Prime, here are two facts that make me optimistic as a shareholder:
Amazon hired 350,000 full- and part-time employees in just four months during the third quarter and early in the fourth quarter. The company is preparing for what's expected to be huge holiday demand. These types of investments are expensive, but they build long-term value through customer loyalty and acquisition.
Additionally, it only seems like everyone is buying everything online these days. They're not. E-commerce accounted for just 14% of U.S. retail sales in the third quarter, according to U.S. Census data. There's still substantial room for Amazon to grow in e-commerce. With Amazon Web Services and Amazon Advertising also driving growth, this company looks like a long-term market beater.
2. Roku
Roku (ROKU -3.05%) is known for its devices that help TVs connect to a seemingly endless amount of online streaming content. The company's stock price has more than doubled year to date, reaching an all-time high above $290 on Nov. 30. Here are two key reasons I still like Roku stock, even after that big run.
Roku vs. S&P 500 performance, data by YCharts.
First, Roku moved quickly in connected TV. That helped it build a massive subscriber base, with 46 million active accounts. While the company doesn't report total users, eMarketer estimated that there were more than 84 million in the United States (before the pandemic), making Roku the market leader in streaming TV platforms. Amazon's Fire TV is second and others are well behind.
Roku's scale is a competitive advantage. Content providers want to be on the platform because that's where the viewers are. As more content comes onto the platform, it attracts more viewers. That cycle provides a powerful opportunity for future revenue growth, which brings me to the second big reason I like Roku: It's monetizing that huge user base through advertising.
When Roku makes deals with content providers, the company typically gets 30% of the publisher's ad inventory to sell. Connected TV advertising has been growing extremely quickly, as marketers chase viewers who are cutting cable for streaming TV. In the third quarter, Roku reported a nearly 90% year-over-year increase in monetized video ad impressions. That helped the company grow its total third quarter revenue by a whopping 73%.
The company has been driving ad growth through the Roku Channel. It has also launched OneView, a platform that marketers can use to buy advertising "programmatically" -- using online software to target specific audiences instead of the traditional method of buying from advertising representatives. eMarketer estimates that U.S. ad spending on streaming platforms will more than double in the next four years, from $8.11 billion in 2020 to $18.29 billion in 2024. Roku is perfectly positioned to capitalize on that trend.
3. DocuSign
DocuSign (DOCU -2.35%) is the leader in electronic signatures for agreements, with about 70% market share. Its growth accelerated in 2020 as businesses scrambled to find solutions in a work-from-home world. The company's stock price has surged more than 200% this year, ending last week at $226.87.
DocuSign vs. S&P 500 performance, data by YCharts.
DocuSign uses a land-and-expand business model -- land customers, then get them to expand spending. Its second-quarter results show that the strategy is working. (The third-quarter report will be released on Dec. 3.) DocuSign reported a record 120% dollar-based net retention rate, which means customers who were on the platform a year ago spent 20% more this year. The number of customers with an annual contract value of more than $300,000 increased 41% year over year to 520.
Is there room for more growth? With a customer base that's grown 75% in two years to 749,000, DocuSign has a lot of expansion opportunities. Typically, that comes in additional use cases for eSignature within an organization. However, there's a longer-term growth story in the company's Agreement Cloud, which offers more than a dozen products. DocuSign's goal is to become part of their larger customers' infrastructure for managing agreements, from the start of the process to the end.
While the company benefited from work-at-home trends, it was growing annual revenue before the pandemic by at least 35% every year since 2018. This year, analysts expect revenue growth to accelerate to 43%. Better yet, the company believes the addressable market for eSignature is $25 billion, with even more upside for the Agreement Cloud. Consider that revenue in the last 12 months has just eclipsed $1 billion, and it's evident the company has a lot of room for growth.
The takeaway
These companies are market leaders with room to grow. Stocks like those don't come cheap. Based on traditional valuation metrics, all three are richly valued. That's why it's important for investors -- especially in high-growth stocks -- to have a long-term view.
A disappointing quarter could cause the stock price to temporarily fall, maybe steeply. While that may not happen, those types of moves can cause selling at the worst time. (I've been guilty.) By contrast, a long-term view allows a company to execute its strategies. I bought shares of Roku and DocuSign this month, and Amazon is one of the largest stock positions in my portfolio. I believe all three can provide market-beating returns for years.
