The stock market defied the odds in 2020, staring down the coronavirus pandemic and still putting up solid gains. The S&P 500 climbed more than 16% last year, while the tech-heavy Nasdaq surged an even more impressive 44%. Technology stocks came into focus last year as the remote-work and stay-at-home trends highlighted the increasing demand for cloud computing, e-commerce, and social media.
For investors looking to strike it rich, finding the best performers in each of these high-growth categories can be a great place to start. Digging a little deeper and focusing on companies with the right combination of best-in-class offerings and large addressable markets can help unearth stocks with the best potential to boost your fortunes.
Let's look at three businesses that meet these lofty criteria.
Image source: Getty Images.
1. Twilio: Speaking to customers where they live
One of the key takeaways of 2020 is that businesses must be able to communicate with customers wherever they are. The digital transformation, which was already in full swing, actually accelerated, making this simple truth more imperative than ever. That's where Twilio (TWLO 0.40%) comes in. The company provides the resources to embed customer communication tools into business software and apps, including phone calls, video, text messages, all without ever leaving the app.
Many consumers have used Twilio's tools without even realizing it. The real-time messages you get from your food delivery service? The updates from your rideshare provider? The ability to reset a password within an app? How about in-app chats with customer service? If you've experienced any of those, there's a pretty good chance it was underpinned by Twilio's technology.
Twilio reported revenue that accelerated for the second successive quarter, closing out the year with a bang. Full-year revenue grew 55% year over year, helping push the company's adjusted profit up 57%.
Client metrics were equally impressive. Twilio's total active customer base closed out the year at 221,000, up 23%. Not only is the company attracting new businesses, but existing customers are also spending considerably more, as evidenced by Twilio's dollar-based net expansion rate of 139%. Put another way, existing customers spent 39% more in 2020 than they did in 2019.
After its recent acquisition of Segment, Twilio increased the estimates for its growth opportunity. Management now believes the company's total addressable market topped $62 billion last year and will grow to $87 billion by 2023. The company's revenue clocked in at just $1.76 billion last year, illustrating the magnitude of the opportunity that remains.
Image source: Getty Images.
2. Etsy: E-commerce for the little guy
While e-commerce platforms Amazon and Shopify stole the headlines last year, they were both outdone by the little engine that could: Etsy (ETSY 0.14%). The tailwinds that propelled digital retail also extended to retro and vintage goods, as well as handmade products. Those trends all played right into Etsy's wheelhouse. The company turned these once niche markets into a lucrative enterprise.
Etsy closed out 2020 on a high note, posting its third consecutive quarter of triple-digit percentage growth in gross merchandise sales (GMS). This propelled 2020 revenue up 111% year over year, resulting in net income that grew 264%. This was pushed higher by marketplace revenue that jumped 120%, while growth of services revenue clocked in at 88%. The company is still benefiting from a pandemic-specific tailwind that slowed as the year wore on: Roughly 4% of GMS was for masks.
The company's network effect continues to expand as active sellers increased 62% for the year and its customer base grew by 77%. Etsy's strategic product enhancements and its disciplined approach to marketing also increased the lifetime value of its customers, resulting in meaningful improvements in user engagement, customer retention, and buying frequency. This was evident in the 160% growth in the number of habitual buyers.
In 2019, Etsy estimated that its total addressable market of $249 billion would increase to $437 billion by 2023. There was a massive acceleration in the adoption of e-commerce last year, so those estimates are likely outdated. Given Etsy generated just $10 billion in merchandise sales in 2020, the opportunity ahead is vast.
Image source: Getty Images.
3. Pinterest: The "other" social media platform
It seems like it's only a matter of time before antitrust and regulatory concerns catch up with Facebook. The company has already attracted the attention of a number of the world's governments, and it appears (almost) inevitable that its seemingly endless series of missteps will eventually come home to roost. Investors looking for exposure to social media growth without all the drama are turning to Pinterest (PINS 0.41%).
The platform acts as a digital repository and "visual discovery engine" that allows users to find, save, and organize all their favorite things from around the internet. This digital scrapbook provides users with a personal space to collect things and pin them to virtual boards. Pinterest helps inspire users to travel, try out a new recipe, plan a wedding, or redecorate their home. More important, the company's positive vibe and ability to avoid the pitfalls of its biggest rival have earned it the title of "anti-social media."
Business is booming. Revenue grew 48% in 2020, while adjusted net income soared more than 1,400%. Pinterest added more than 100 million monthly active users, bringing the total to 450 million, while the average revenue per user climbed 12%. U.S. growth has done the bulk of the heavy lifting thus far, but it's the international opportunity that should have investors excited. International revenue grew 78% sequentially in the most recent quarter while soaring 145% year over year, showing that the global growth story has just begun.
Pinterest generated revenue of $1.7 billion in 2020, which pales in comparison to its $500 billion addressable market, so the opportunity that remains is enormous.
Data by YCharts.
Every rose has its thorns
As a result of the significant run-up in these stocks' prices over the past year, each of the three falls squarely in the high-risk/high-reward category. There's been a corresponding increase in the associated sticker price, too, as Twilio, Pinterest, and Etsy are selling at 35, 29, and 19 times sales, respectively -- when a good price-to-sales ratio is generally between 1 and 2.
Thus far, however, investors have been willing to pay up for the impressive top-line growth and the potential for the explosive profits that are just within reach. Add in the massive addressable markets, and it's easy to see how each of these tech stocks could make you richer in March and beyond.
