What makes you confident that a given stock has a great chance of delivering strong gains? Maybe it's the stock's previous performance. Perhaps it's a huge market opportunity. The company might have a distinct competitive advantage you really like. Or you could simply have a positive gut instinct about the stock.
All of these are answers that I'd probably give when responding to the question. A good exercise at the beginning of each year is to go through the stocks that you own (or want to buy) to assess how confident you are about their prospects. That's what I recently did. Here are my three highest-conviction growth stocks for 2021.
Image source: Getty Images.
1. Fiverr
Fiverr (FVRR 3.74%) absolutely crushed it in 2020, with its shares skyrocketing 730%. Even with this huge gain, the company's market cap is still only around $8 billion.
There are plenty of websites that allow businesses to find freelancers. Many of them are basically staffing agencies. Freelancers often have to bid on jobs and negotiate contracts. Fiverr's e-commerce platform is different. It takes a service-as-a-product approach. Freelancers post their skillsets, experience, and a set price for what they'll do. There's no bidding or negotiation. Buyers know exactly what they're getting for their money.
This no-haggle approach is working really well for Fiverr. The company's number of active buyers has soared more than 70% over the last three years -- with no sales force at all. Average spend per buyer has jumped nearly 64% during the same period. Fiverr's revenue growth is accelerating, vaulting 88% higher year over year in the third quarter of 2020.
The company estimates its total addressable market in the U.S. is around $115 billion annually. But this market is growing. As a result of the COVID-19 pandemic, more individuals are working remotely and interested in freelancing to supplement their income. Fiverr isn't just targeting the U.S. market, though. It continues to expand internationally. I'm very optimistic about the company's prospects in 2021 and beyond.
2. Etsy
Etsy (ETSY 0.34%) stock more than quadrupled last year. The e-commerce platform for handcrafted goods really clicked with customers during the pandemic. Etsy especially received a boost from face mask sales. But I don't think the momentum will fade once the pandemic is over.
Sure, 11% of Etsy's overall gross merchandise sales (GMS) in Q3 stemmed from face mask sales. However, the company's GMS soared 93% year over year excluding face mask sales. My view is that the customers who were drawn to Etsy in 2020 mainly to purchase a facemask will be likely to return to the platform to buy other products. In other words, the pandemic will be a long-term growth driver for Etsy rather than providing only a temporary boost.
The biggest competitive advantage for Etsy is its uniqueness. In a 2019 survey, a whopping 88% of buyers said that Etsy sold items that they couldn't find anywhere else. The merchants on Etsy are usually small businesses, many of which sell personalized handcrafted products. This sets Etsy apart in terms of customer appeal but also in terms of performance: Etsy's sales are growing more than twice as fast as the Department of Commerce's e-commerce benchmark.
Even with its impressive growth, Etsy still claims only a 5% market share of the $100 billion annual market for what it calls "special" products (unique handcrafted items). But the company's actual addressable market is probably closer to $250 billion per year and perhaps even more than that. I fully expect that Etsy will continue its winning ways this year and throughout the rest of the decade.
3. Intuitive Surgical
Robotic surgical system pioneer Intuitive Surgical's (ISRG 0.59%) business was hit hard by the coronavirus outbreak. Non-emergency surgeries were postponed during part of 2020. As a result, Intuitive's revenue slipped 22% year over year in Q2 and 4% in Q3. However, its shares still jumped 38% in 2020 as investors looked forward to better days ahead.
I think those better days will arrive this year. Two COVID-19 vaccines are currently available in the U.S. with millions of Americans already at least partially vaccinated. There's reason to be hopeful that life will soon begin to return to normal. That means delayed surgical procedures will again be scheduled.
Intuitive Surgical makes the lion's share of its revenue from selling replacement instruments and accessories. When more procedures are performed using its da Vinci robotic surgical systems, Intuitive's revenue goes up. I foresee that happening in 2021. What really makes Intuitive Surgical such a high-conviction stock for me, though, is its long-term potential.
Aging populations across the world will drive increased demand for surgical procedures. Meanwhile, Intuitive continues to launch innovative new products to expand the types of procedures that can be performed using surgical robots. Intuitive's market opportunity is massive because only a small percentage of procedures can currently be done with robotic assistance. My view is that Intuitive Surgical is nearly a slam-dunk to win over the long run.
