The benchmark S&P 500 is on track to end the year notably higher, but that doesn't mean it's been a smooth ride. Since the end of February, we've seen the fastest bear market slide on record, as well as the quickest rebound rally to new highs from a bear market low. This volatility has been the perfect lure for millennial investors.
Online investing app Robinhood, which is known for its commission-free trades and free stock gifts to new members, has been gaining new users hand over fist in 2020. The average age of Robinhood's user base is only 31. This suggests it's been attracting millennial and novice investors in droves.
While it's fantastic to see young people putting their money to work in the market, many are piling in without a basic understanding of how to build wealth. Instead of buying high-quality companies and allowing compounding to work its magic over the long run, most millennial and novice investors on Robinhood are chasing awful companies, or whatever happens to be the hot stock or industry of the week.
Investing for the short-term usually doesn't pay off. It's impossible to predict short-term movements in the market and individual stocks with any real accuracy over the long run. Not surprisingly, many of Robinhood's leaderboard stocks (i.e., the 100 most held stocks on the platform) are currently valued above Wall Street's consensus price target.
But not all Robinhood stocks are disasters. There are, in fact, three Robinhood stocks that I'm very excited about. Each offers exceptional growth prospects, intriguing innovation, and plenty of upside for patient investors.
I'll admit that it's easy to get excited about a company you own that has more than quadrupled in value from your cost basis in less than a year. But even after big gains in 2020, payment processor Square (SQ 0.08%) still offers incredible long-term upside.
The Square growth story began nearly a decade ago with its seller ecosystem. This segment provides point-of-sale devices and analytic tools primarily to small businesses to facilitate payments. Between 2012 and 2019, the total payment volume crossing Square's network ballooned from $6.5 billion to $106.2 billion -- a 49% compound annual growth rate.
What's so exciting about the seller ecosystem is how effective it's been in recent years at courting larger businesses (those with $125,000 or more in annualized gross payment volume (GPV)). Once a small percentage of total GPV, medium and large businesses accounted for 61% of GPV in the third quarter of 2020. Since this is a merchant fee-driven operating segment, the adoption of its platform by larger businesses could really drive gross profit higher.
Square's other key catalyst is peer-to-peer payment platform Cash App. In less than three years, Cash App's monthly active user count more than quadrupled to 30 million, with approximately 7 million users utilizing Cash Card -- a debit-card linked to a user's Cash App account. Rather than focusing solely on merchant fees, Cash App allows Square to collect revenue from a multitude of channels, including bank transfers, investments, and a bitcoin exchange.
Square has the tools and innovation to outpace nearly every fintech stock in the growth department this decade. I believe it has a real chance to one day reach a $1 trillion valuation.
Palantir provides data-mining services to the federal government via its Gotham platform and to enterprises via its Foundry platform. In the most recent quarter, Gotham was responsible for 56% of the company's sales, up from 51% of sales in the prior-year quarter. While its reliance on government revenue has some investors worried, I view federal contracts as a veritable gold mine. Short of losing a contract, Palantir isn't going to have to worry about defaults.
What I'm especially excited about is Palantir's data-mining applications in the enterprise space. Foundry's revenue grew by 35% in Q3 2020. That's only about half the rate of Gotham, but the longer-term upside, in terms of contract value potential, is considerably higher for Foundry.
I'd also encourage investors not to be too concerned with early stage losses from Palantir. Its Q3 report featured an unsightly net loss of $853.3 million, which ran its nine-month net loss in 2020 north of $1 billion. However, closer to $778 million in net loss was attributed to stock-based compensation recognition tied to its direct listing. Though these are valid expenses on an income statement, they aren't recurring. Even with aggressive reinvestment, Palantir looks ready to turn the corner to recurring adjusted profitability.
Significant pullbacks in Palantir should be considered buying opportunities.
Even with a $785 billion market cap, I find social media giant Facebook (META 1.05%) a fascinating and exciting company.
Let's start with the basics: People love Facebook. It ended September with 2.74 billion monthly active users, which goes along with 3.21 billion family monthly active people. This larger number includes monthly active users on other owned platforms, such as Instagram and WhatsApp. There's not a social platform anywhere on this planet that comes close to 2.74 billion monthly users, which is what makes Facebook such a logical go-to for advertisers.
Facebook owns four of the six most-visited social sites in the world: Facebook, WhatsApp, Facebook Messenger, and Instagram. Interestingly, only two of these four platforms (Facebook and Instagram) are being monetized at the moment. CEO Mark Zuckerberg and his team have proved masterful in slow-stepping the monetization of its platforms without ruining the user experience. Once WhatsApp and Facebook Messenger are monetized, Facebook's already robust sales could double yet again.
Legal issues are no significant threat for the social media kingpin. If it retains control of WhatsApp and Instagram, Facebook will have the potential to double sales by 2024, if not sooner. It's also possible these assets could be worth even more if they're spun off into stand-alone businesses. This looks like a win-win either way for shareholders.
With cash flow expected to skyrocket in the coming years, I'm counting on Facebook to push well past the $1 trillion valuation mark.