It's generally understood that the best path to wealth generation is investing your hard-earned money in quality companies and holding them over the long-term. Investors can ignore the latest "get-rich-quick scheme," secure in the knowledge that even those who achieve average returns will still easily surpass the paltry rates offered by a savings account or a certificate of deposit.
That said, investors who are willing to do just a little bit of investigative work can do even better. Just beating the broader market indexes by a couple of percentage points each year can generate massive gains when measured over years or decades. One tried-and-true way to prosper is to recognize the biggest, overarching megatrends out there, identify some of the key players involved, buy stocks in those companies, and settle in for the ride.
Let's look at three megatrends and six companies involved in them that have the potential to generate big returns in 2021 and beyond.
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1. Streaming video
Cord-cutting has reached epic proportions in recent years, and the trend is only accelerating. The largest pay-TV providers lost 4.9 million customers in 2019, the largest single-year decline in cable TV history, according to a report by Leichtman Research Group. Those losses came on the heels of 2.87 million subscriber defections in 2018 and 1.51 million in 2017. Many of those cord-cutting customers have adopted streaming video for their viewing alternative.
As the number of internet viewing choices continues to climb, Roku (ROKU +3.33%) remains one of the clearest ways to play the ongoing migration to streaming video. The company's streaming devices are service agnostic, supporting ad-supported and paid services alike. Roku hosts more than 5,000 streaming channels on its platform, so there's sure to be something for every viewer.
This approach is paying off. In the third quarter, Roku's active accounts have grown to 46 million, up 43% year over year. Engagement is also increasing, as streaming hours surged 54%. The company's platform segment, which accounts for the lion's share of Roku's revenue, soared 78% in the most recent quarter.
Disney (DIS +1.97%) is another company set to thrive in the streaming era. When its flagship streaming service, Disney+, launched late in 2019, the House of Mouse said it expected between 60 million and 90 million subscribers by 2024. Fast forward a year, and the company already has 87 million paid subscribers worldwide and now expects its roster to grow to between 230 million and 260 million by 2024. Even as its other Disney business segments were decimated by the pandemic, revenue from its direct-to-consumer segment climbed 81% in fiscal 2020.
Image source: Getty Images.
2. E-commerce
The trend toward online retail was already firmly established, but it is now a high-speed train barreling down the tracks. E-commerce as a percentage of U.S. retail has tripled over the past decade, accounting for 13.5% of total retail sales in the third quarter of 2020. While the rate of adoption might taper off in the wake of the pandemic, digital retail is here to stay.
Shopify (SHOP +3.61%) is uniquely positioned to capture that tiger by the tail. The company offers a one-stop-shop for merchants who want to take their businesses online, without the muss and fuss of trying to do it on their own. Shopify not only offers the basics like website design and customization, but it also provides integration with all the major shipping and payment processors. Additionally, the service provides other business essentials like payroll processing, inventory management, and even working capital loans.
The pandemic has acted as a catalyst, causing Shopify's year-over-year revenue growth to roughly double in each of the past two quarters, while gross merchandise volume has also grown at triple digits. The company is also profitable so far this year.
While it might not seem like an e-commerce play at first glance, Fiverr International (FVRR +2.06%) is positioned to benefit from human commerce, or rather, connecting gig workers with businesses. The company's digital platform provides a location for freelancers to list their services, while bringing in businesses looking for those services. The gig economy is just getting started, with Fiverr as a facilitator.
The company collects a flat fee of 20% from the seller, and its position as a matchmaker has been extremely lucrative. For the first nine months of 2020, revenue climbed 72% year over year, accelerating in each of the past four quarters, and hit 88% in the most recent quarter. The company is also edging closer to profitability.
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3. Cybersecurity
As the world becomes increasingly digital, the temptation for nefarious players to line their pockets grows. Cybersecurity has never been more important, particularly in the face of the recent SolarWinds hack that targeted not only government agencies, but enterprise companies like Microsoft.
As hackers become increasingly sophisticated, more businesses will turn to cybersecurity providers to safeguard their data. Wedbush analyst Daniel Ives suggests this could result in an additional $200 billion windfall in cloud security spending over the coming five years. The focus will be on advanced threat detection, zero trust architecture, data security, and identity security, according to Ives.
The ability to stop cybersecurity threats before they start is one of the hallmarks of CrowdStrike Holdings (CRWD +1.25%), which strikes right at the heart of the matter. The company specializes in protecting the endpoints -- servers, desktops, laptops, mobile devices, and more. Its Falcon platform uses information gathered across its client network to identify and shut down attacks.
By authenticating, authorizing, and continuously validating users and their credentials, the cloud-based platform not only protects against known issues, but it also identifies evolving threats with the help of artificial intelligence. It's worth noting that the hackers behind the SolarWinds attack tried to gain access to CrowdStrike, but were ultimately unsuccessful.
The company's cutting-edge security is turning heads. During the first nine months of 2020, CrowdStrike's revenue climbed 85% year over year, while annual recurring revenue jumped 81%. Even more importantly, net new subscription customers increased 88%, laying the foundation for greater recurring revenue in the future. CrowdStrike isn't yet profitable, but it's edging closer every day.
Another company providing state-of-the-art protection focused on zero-trust is Zscaler (ZS +0.03%). The company operates in the cloud, to provide greater reach than is possible to achieve with traditional cybersecurity solutions. By providing secure connections between remote employees and their businesses' cloud-based resources, Zscaler has upended the age-old cybersecurity model of building better walls and digging deeper moats.
Business is booming. In its fiscal first quarter (ended Oct. 31), Zscaler's revenue grew 52% year over year, but even that doesn't tell the whole story. The company has grown revenue at a compound annual growth rate (CAGR) of 64% since 2016. Like many high-growth companies, Zscaler isn't yet profitable, preferring to use its limited resources to focus on new customer acquisition.
