When Snowflake went public in September, the investment community was abuzz. The cloud-data warehousing company had astounding growth, proven leadership, and a world of traders clamoring for shares. The stock more than doubled on the first day of trading and hasn't looked back.
With the stock now up almost 32% since the IPO and trading at valuations reminiscent of the dot-com bubble, I'm looking at three other hypergrowth stocks that may give shareholders a better chance at future returns. Genetic testing, pet supplies, and short-term rentals aren't as sexy as cloud-data storage, but I think Fulgent Genetics (FLGT 1.89%), Chewy (CHWY 1.66%), and Airbnb (ABNB 2.58%) offer an opportunity for better returns over the next three to five years.
Image source: Getty Images.
1. Fulgent Genetics
Fulgent has taken advantage of an avalanche of new business because of the COVID-19 pandemic. Management was able to rapidly deploy a COVID-19 diagnostic test in March, and change focus from testing for rare diseases, cancer, and other genetic conditions to testing for the new virus. In the company's latest quarter, which ended Sept. 30, revenue increased 880% to $101.7 million. Even better, non-COVID-19 testing shook off the shutdowns and jumped 57% over the second quarter.
Management now believes its full-year sales will be $235 million -- more than 600% growth from $33 million in 2019. Fulgent Genetics has proven it can scale profitably. While testing volume increased 50 times compared to the third quarter of 2019, its gross margin rose to 74%. That's better than the 62.5% in the third quarter of 2019. Further, operating margin jumped to 62.5% compared to 14.6% in the same quarter a year ago. This is a business growing fast without adding a lot of expense -- a great recipe for long-term stock gains.
2. Chewy
My family, like many others, added a furry companion to our household during the pandemic. Pet ownership is up dramatically this year: A recent LendingTree survey found that 8% of respondents who owned a pet got it between March and September. Chewy -- an online pet-food and supplies provider -- is benefiting from the surge. Adding fuel to the fire, general spending on pets is also up. Being stuck at home, it turns out, is a great time to add a furry companion to the family and pamper them once they arrive.
In the company's third quarter ending Sept. 30, sales were up 45% compared to the same period last year. Want more proof Chewy is taking advantage of the boom? Of the company's 17.8 million active customers, 5.1 million were added this year. There were several good reasons why the company didn't turn a profit despite all the sales -- and they all point to more growth ahead. Management has added two new fulfillment centers, a pet pharmacy business, and Connect with a Vet, the company's pet telehealth service. With Chewy's booming business and investments in growth, I'm much more confident predicting owners will be spoiling their pets and enjoying remote vet services a decade from now than I am predicting which cloud technology will dominate.
3. Airbnb
Investors are right to be wary of Airbnb, which IPO'd on Dec. 10. Like Snowflake, the stock more than doubled on its first day and had seasoned investors shaking their heads at the valuation. Still, there is something different about this company that makes it hard for me to dismiss it so easily. Unlike many hot tech companies, Airbnb was founded by design students. I'm a big believer in the advantage of different perspectives, and I think the Airbnb founding story offers one of the best. Early on, to help its customers (the people listing rentals) be successful, the founders booked places themselves and eventually hired professional photographers so the properties looked as attractive as possible online -- and sales jumped. It seems simple now, but it demonstrates the value of the non-tech perspective and a commitment to not overlook any steps that Airbnb takes to engage customers.
Airbnb has demonstrated surprising resilience this year. Although the total gross booking value -- the value of all bookings on the site -- is down 39% over last year, the impact was concentrated early in the pandemic. It's also clear the company has the ability to achieve profitability -- Airbnb was in the black in all Q3s of 2018, 2019, and 2020. From 2015 to 2018, the operating margin consistently increased, producing operating profit of nearly $19 million in 2018. Over the same time, sales growth had slowed from 80% to 43%. In 2019, management ratcheted up spending on sales and marketing to support growth and operating profits once again went negative. Despite the first-day pop and the torrent of naysayers, I believe Airbnb is a fast-growing business, trending toward profitability, with a dominant position in a market segment that is eating away at traditional hotels. Toss in an addressable market of $1.5 trillion and a splash of visionary leadership, and you have a hypergrowth stock I'd rather buy than Snowflake.
