The stock market hit rock bottom in March of 2020, and the speed of the stock market recovery since then has been dizzying. In fact, it's hard to find stocks that haven't doubled over the past year.
Therefore, for this article, I'm not looking for stocks that have doubled in just the past year. I'm looking at stocks that have doubled from where they were in the months preceding last year's market crash. The three stocks I'm highlighting today have all found ways to adapt and grow during the pandemic. And I believe they can still grow meaningfully from here.
Image source: iRobot.
1. iRobot
From 2017 to 2019, shares of iRobot (IRBT 2.23%) went up and down, but mostly stayed inside a fixed range. And during the 2020 market crash, the stock cratered and approached its 2005 initial public offering (IPO) price -- ouch. For years, the market has questioned the company's competitive advantage in the autonomous vacuum space. And during the pandemic, investors questioned if its premium-priced products could thrive in a recession.
iRobot has proved the doubters wrong during the past year, finally propelling the stock to market-beater status. Despite its strong brick-and-mortar retail presence, the company's full-year 2020 sales grew 18% from 2019. This growth was assisted by skyrocketing direct-to-consumer (DTC) sales -- fourth-quarter 2020 DTC sales were up 117% year over year to $68 million. This is significant because iRobot's differentiation approach involves developing a direct relationship with its customers.
iRobot is building DTC relationships through e-commerce sales, which it hopes will be 20% of total revenue by 2023. Additionally, its new operating software provides greater robot customization and requires an iRobot app account, bringing the company closer still to the end customer. And iRobot hopes to leverage these consumer relationships into various recurring revenue streams in the future. For just one example, it's currently testing a robot-as-a-service (RaaS) offering in some markets.
For iRobot, it hopes recurring revenue from sources like RaaS will provide predictable, high-margin revenue down the line, which I think can create fuel for more market-beating stock returns. But don't misunderstand: The company is already highly profitable with earnings per share of $5.14 in 2020, making this look like a value stock in today's market.
Image source: Getty Images.
2. Snap
Snap (SNAP 2.24%) owns popular messaging app Snapchat. When it held its IPO in early 2017, I refused to touch it with a 30-foot pole. Revenue growth was superb, up nearly seven times from 2015 to 2016. But the company's losses were staggering at almost $515 million, which exceeded revenue at the time. Furthermore, Snap had no clear plan to become profitable and was merely trying to sell the market on the idea that it was a camera company and not an app, despite only just launching its Spectacles camera months prior to the IPO.
Simply put, Snap management didn't seem to prioritize the creation of shareholder value. And indeed, from 2017 through 2020, the company averaged an annual net loss of around $1.7 billion. Seeing numbers like these made me feel validated in my aversion to a Snap investment.
As investors, however, we must willingly accept when a story has changed. And I think Snap's story is entering a new chapter. In 2020, the company had positive earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first time ever for a full year. Granted, EBITDA is the lowest bar when it comes to profits -- I like net income according to generally accepted accounting principles (GAAP) or free cash flow better. But Snap achieved its 2020 goal of positive EBITDA and it believes it's the first stepping stone toward better profits.
Snap's revenue growth has accelerated for two straight years -- from 42% year-over-year growth in 2018 to 46% growth in 2020. For the first quarter of 2021, it's guiding for further acceleration to almost 60% annual growth and maintaining a 50% or more revenue growth rate for "multiple years." Just for perspective, maintaining 50% growth would take annual revenue over $10 billion in under four years.
This eye-popping revenue growth will leverage the ad platform that Snap has already built, meaning much better profits could finally be just around the corner. With growth compounding like this, the company could look very different in a very short amount of time, which has me seriously considering Snap as an investment today.
Image source: Getty Images.
3. Zebra Technologies
Finally, Zebra Technologies (ZBRA 1.81%) is a quiet outperformer. The company gets its name from its barcode printers and scanners, which help companies manage inventory. Net sales fell less than 1% in 2020, as the COVID-19 pandemic slowed economic activity early in the year. But things rebounded by the fourth quarter, with Q4 sales growing almost 10% year over year to deliver record quarterly sales.
Of course, Zebra's services extend far beyond scanning a barcode at checkout. Almost anything can get a barcode for analytics, from hospital patients to football players. Hospitals are using the technology to keep track of patients and certain vital signs in real time, while the National Football League enjoys displaying player data in various ways to its audience. Furthermore, over time, it only seems reasonable that supply chains will become increasingly smarter. And it's hard to imagine that happening without Zebra being a valued part of the equation.
For 2021, Zebra expects top-line growth of 10% to 14%, most of which will be organic. You may be able to find faster growth elsewhere, but consider its free-cash-flow (FCF) generation. The company converted 20% of revenue into FCF in 2020, which is outstanding profitability. Furthermore, the valuation is compelling here at under six times sales.
In other words, Zebra has strong operating metrics that more than make up for its modest growth. And the stock is priced reasonably enough to reward shareholders over the long haul.
Returns since Oct. 17, 2019. IRBT data by YCharts
3 stocks, 3 levels of risk
Of these three stocks, I like iRobot the best today. I like its current business and I think its pivot toward a more recurring-revenue model is a great move. However, if Snap grows as it's projecting and makes decisions to prioritize profitability, then it could have a much higher ceiling than iRobot over the next three to five years. That said, I'm still personally on the fence about whether it's a buy or whether management needs to show more improvement first. Finally, for its part, Zebra may have the most modest upside, but its strong FCF generation and reasonable valuation give it the lowest downside risk, in my opinion.
