One of the weirdest and wildest years in stock market history has come to a close. Despite losing over a third of its value during the first quarter of 2020, the broad-based S&P 500 spent the final nine months of the year rallying to record highs. In fact, the S&P 500 doubled its historical average annual return in a year that saw the sharpest recession in decades.
While there were many things that stood out about 2020, the outperformance of growth stocks tops the list. Approximately 1 in every 10 New York Stock Exchange- or Nasdaq-listed stocks with a market cap of at least $300 million gained 100% or more in 2020. These are highly out-of-the-ordinary gains -- but I don't know any investors who are complaining.
The good news is that lending rates should remain at or near historical lows for years to come. This will spur high-growth companies to borrow cheaply in order to innovate, hire, acquire, and expand. In other words, some top-performing, high-growth companies still have plenty of upside to come.
The following four growth stocks have the potential to be 10-baggers (an increase in market value of at least 1,000%) before the decade is over.
Even with its incredible 2020, it seems like social media platform Pinterest (PINS -0.17%) is just getting started.
Like Facebook, Pinterest hasn't run into the user growth wall that many of its social media peers eventually hit. The company's monthly active user (MAU) count was growing by 30% annually between 2017 and 2019. It picked up even more last year with people stuck in their homes because of the coronavirus disease 2019 (COVID-19) pandemic. Pinterest ended September with 442 million MAUs. It should have no trouble surpassing 500 million in 2021. The more users Pinterest attracts, the easier it'll be to generate ad revenue.
Pinterest is gaining most of its new users from overseas markets. Though average revenue per user (ARPU) is lower in international countries, Pinterest has the opportunity to double its ARPU multiple times this decade. This is why its revenue growth is consistently above 40%.
The company could turn into an e-commerce giant. Since its MAUs are willingly sharing the products, places, and services that interest them, it's only logical for Pinterest to connect these motivated users to small businesses that cater to their interests.
Given time, Pinterest can deliver 10-bagger returns.
Precision medicine is all the rage, and any product that personalizes the treatment process has the potential to go big. That's why the sky's the limit for Teladoc Health (TDOC 1.64%).
Among companies that benefited from COVID-19, Teladoc is at or near the top of the list. Physicians have done what they can to encourage sick and at-risk patients with chronic illnesses to stay out of their offices. This has led to a significant uptick in virtual visits on the Teladoc platform. In each of the past two quarters, Teladoc's total visit count more than tripled from the prior-year period. Teladoc's full-year results will likely show that it easily surpassed 10 million total visits in 2020.
While the trajectory of virtual visits may slow a bit thanks to coronavirus vaccines, telehealth remains very much the future of the personalized treatment process. The convenience of virtual visits for patients and physicians, and the lower billing cost associated with telehealth for insurers, should entrench Teladoc Health as a key treatment facilitator for years to come.
It also doesn't hurt that Teladoc acquired the rapidly growing Livongo Health in a cash-and-stock deal. Applied health signals company Livongo tallied more than 400,000 members with diabetes prior to its acquisition. It had also turned the corner to profitability. Imagine how powerful Livongo can be under the Teladoc umbrella with the ability to expand into new indications and cross-sell its services.
Investors can't talk about 10-bagger paw-tential without mentioning companion animal health insurer Trupanion (TRUP 0.51%).
Generally, insurance companies are slow-growing money machines that investors buy for their income potential. That's not what you'll get with Trupanion. The company has been building its member base for the past two decades. It should offer sustainable sales growth of 20% or more throughout the decade.
According to the American Pet Products Association, nearly 85 million households in the U.S. own a companion animal, and an estimated $99 billion was spent on those pets in 2020. At no point over the last quarter of a century have year-over-year pet expenditures declined. Felines and canines are almost always treated as members of the family, so pet owners will spend big to ensure their well-being.
The crazy thing is that only 1% of the addressable companion animal health insurance market in the United States has been penetrated by companies like Trupanion. If this addressable market reached 25% -- as it has in the U.K. -- Trupanion would have an addressable U.S. market worth north of $32 billion. For context, Trupanion's 2020 sales will come in at around $500 million.
With Trupanion nearing recurring profitability and laying the groundwork to become the premier health insurer for U.S. cats and dogs, a 1,000% gain before 2030 is totally doable.
Rounding out the list is e-commerce platform Etsy (ETSY 1.96%), which has "only" doubled its sales through the first nine months of 2020.
Although I've already included Pinterest, the opportunity for specialized e-commerce is undeniable. Etsy stands out for its focus on small businesses. Connecting consumers with small businesses that can create unique or customizable products helps drive repeat business. During the third quarter, Etsy noted that existing buyers increased their purchasing activity, as measured by gross merchandise sales, by more than 50% from the prior-year period. Attracting new customers is fantastic, but Etsy's key margin driver is going to be retaining repeat users -- and having those users progressively spend more.
Etsy has also been aggressively reinvesting in tools that will increase high-margin services revenue. For instance, it introduced listing videos on a beta basis during the third quarter. Etsy also reworked its Etsy Ads infrastructure to provide more actionable data and search results to merchants while using fewer cloud resources.
In 2021, Wall Street is counting on Etsy to generate $1.8 billion in sales. That'd be about 12% higher than 2020 and would reflect a slowdown in face mask sales, which have accounted for around 11% of total revenue. Still, this represents just the tip of the iceberg for Etsy's addressable market, which likely tops $100 billion.
Despite being in the very early stages of its growth, Etsy has already figured out how to boost repeat spending and make its services segment more efficient. Patient investors should have a real shot at 1,000%+ gains this decade.