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3 "YOLO Stocks" That Are Just Getting Started

By Jamal Carnette, CFA - Dec 30, 2020 at 8:07AM

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Young investors are liking these stocks. That's smart.

Initially fueled by boredom, many beginning investors this year have found a community in stock-trading chat rooms, where stories of so-called YOLO (you only live once) trades dominate the conversation.

If you're a long-term investor, you might understandably think this acronym would spell disaster for investors...and you'd mostly be wrong to this point. Many of these investors are doing surprisingly well in this bull market.

Multiple reports have found that the stocks that can be deemed YOLO stocks -- stocks widely discussed in the chat rooms rife with investors talking about YOLO trades -- are outperforming both the broader stock market and even hedge funds.

While I certainly wouldn't recommend a risky and undiversified approach to investing, it's worth looking further into if the stocks these risk-loving investors are embracing are worth your hard-earned investing money. Read on to find three such stocks -- Align Technology ( ALGN -0.83% ), PayPal ( PYPL -1.72% ), and Etsy ( ETSY -7.31% ) -- are smart investments.

Man reading financial charts on computer

Image source: Getty Images.

Align Technology is changing an entire industry

Align Technology might seem like an overnight success, but it's been decades in the making. The maker of the Invisalign brand of teeth aligners was founded in 1997 and debuted in the public markets in 2001 with a way to disrupt traditional orthodontics from within. Align spent the earlier part of its existence developing relationships within the dental community, choosing to leverage the trust between dentists and patients as its primary sales channel.

Align Technology's stock suffered early in the pandemic as non-essential services like dental visits were heavily affected. However, a return to revenue growth -- 21% year over year -- in the third quarter pleasantly surprised Wall Street and put the stock into overdrive.

Looking under the hood, the results appear better than advertised. Align reported 20% year-over-year revenue growth from its clear aligner product, which was expected to be a tough comparison on account of the fact that 2019's revenue was boosted by an agreement to supply aligners to Smile Direct Club. Invisalign-branded case shipments, a truer comparison for year-over-year operational performance, increased 29%.

Ending the Smile Direct Club supply agreement at the end of 2019 might have led for difficult year-on-year comparisons this year, but it was ultimately a better decision for long-term investors. The supply agreement ended amid allegations Align had broken the non-compete clause of their agreement, notably by opening a direct-to-consumer line of InvisAlign stores. An independent arbitrator agreed with Smile Direct and ruled Align must close its direct-to-consumer storefronts and could not reopen them until 2022.

While there's risk the established relationships with dental professions that Align spent decades cultivating could be strained by this new and additional sales channel, going direct-to-consumer and owning the relationship soup-to-nuts should make it easier to reach more customers and be a driver of future revenue growth.

PayPal is leading the cashless revolution

Shares of mobile payment processing company PayPal Holdings are thriving during the pandemic, up 121% as of this writing. The underlying business is firing on all cylinders as well: PayPal reported total payments volume (TPV) grew a record 36% year-over-year (currency neutral) in the third quarter.

PayPal's business has held up well during the pandemic, even posting TPV growth of 18% in the first quarter. The second-quarter (29%) and third-quarter growth referenced above have shown the resiliency of PayPal's business model, as both significantly exceeded the 23% TPV growth PayPal produced in 2019. TPV growth was driven by an acceleration in active accounts, which increased 22% in the third quarter versus growth of 16% in last year's corresponding period.

One reason for PayPal's success has been its strong history of successful fintech acquisitions, ranging from Venmo to Xoom. Its 2019 $4 billion acquisition of Honey Science is starting to pay off, as it alone was responsible for 1.2 million of the 15.2 million net active account additions in the third quarter.

The company will continue to benefit from the growth in the cashless economy, but it also has a new engagement driver in the offing. PayPal recently introduced the ability to buy and hold cryptocurrencies in the PayPal wallet and will allow for digital currencies to become a funding source to pay merchants starting early next year.

Etsy's stock isn't done yet

Etsy's stock gains have been nothing short of phenomenal this year, advancing nearly 350%. As a platform to connect small businesses and customers, billing itself as a "global marketplace for unique and creative goods," Etsy's growth was aided by demand for stylish face masks. Consensus estimates are that the company will report full-year revenue of $1.6 billion, a figure 97% higher than the prior year. However, the narrative that Etsy is just a pandemic stock is simply wrong.

Etsy makes money from its sales platform by connecting buyers and sellers and taking a percentage of each transaction. The economics of the underlying model -- high-margin and asset-light -- are favorable to investors.

For the longest time, Etsy had a record of being unprofitable due to reinvesting in the business -- mostly for customer and seller acquisition -- with the rationale being that once it has users in its ecosystem, they tend to stick around and make multiple purchases over years.

It's been working, with active buyers in the third quarter growing 55% and habitual buyers, those buying more than six times in the prior year, increasing by 104%. The pandemic will eventually end, but Etsy's sellers will continue to innovate and bring high-quality products to their platform. Etsy's platform will continue to see increased active users due to its sticky user experience and investors will continue to reap the rewards.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Align Technology, Inc. Stock Quote
Align Technology, Inc.
ALGN
$619.75 (-0.83%) $-5.18
Etsy, Inc. Stock Quote
Etsy, Inc.
ETSY
$231.33 (-7.31%) $-18.23
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
PYPL
$183.93 (-1.72%) $-3.22
SmileDirectClub, Inc. Stock Quote
SmileDirectClub, Inc.
SDC
$2.71 (-9.37%) $0.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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