You don't have to be rich to get started in the stock market. Just a $500 opening investment could set the foundation for life-changing returns over the long term. And if you're ready to put a sum like that into the market, growth companies DraftKings (DKNG +0.30%) and Revolve Group (RVLV +5.83%) could be great options now.
1. DraftKings
The legal sports betting industry is heating up, and DraftKings is one of the most exciting ways to invest in this trend. The wagering platform's breakneck growth rate and digital-only business model help set it apart from its casino-focused competitors.
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Twenty-five states currently allow sports betting, and analysts at Morgan Stanley expect 12 more to legalize it this year to help compensate for pandemic-related budget shortfalls. Morgan Stanley expects the market to be worth as much as $15 billion by 2025, and DraftKings stands to benefit from this growth trend. The company expects revenue to surge up to $1 billion this year, which would be a 55% increase, due to the effectiveness of its marketing and thanks to successful launches in states such as Michigan and Virginia.
DraftKings isn't profitable yet, so the stock can't be valued based on its earnings. But with a market cap around $24 billion at Tuesday's prices, shares trade at roughly 24 times projected full-year revenue of $1 billion. DraftKings' top-line valuation is significantly higher than sports betting competitors MGM Resorts and Penn National Gaming, which trade for just 3.7 and 4.3 times sales, respectively. However, DraftKings deserves a premium price tag because of its faster growth rate and digital-only business model. Unlike these rivals, DraftKings doesn't operate physical casinos, which fared poorly during the pandemic. MGM Resorts' revenue fell by 53% in 2020, while Penn National Gaming's revenue shrank by 23%. Draftkings saw sales grew 90% in the same period.
2. Revolve Group
Revolve Group is a fashion retailer that targets millennials and Generation Z. Despite having an online-only distribution channel, it stands to benefit as the coronavirus pandemic eases in the U.S. because the return to something like normalcy will allow it to resume its unique social media marketing strategy.
Revolve Group's marketing focuses on lifestyle content. The company provides free clothing and access to exclusive events to its network of 4,500 Instagram influencers. In return, those influencers create engaging content that promotes Revolve's brand to their social media followers. The pandemic largely derailed that strategy as marketing events such as the annual Revolve Festival (affiliated with Coachella) were canceled.
Revenue fell by 3% last year to $581 billion (down from a 21% growth rate in 2019), although Revolve managed to increase earnings before interest, tax, depreciation, and amortization (EBITDA) by 25% to $69 million by slashing spending on marketing and administrative expenses.
Because of uncertainty about the pandemic, management is skipping guidance for 2021. But CEO Mike Karanikolas indicates that growth trends are already improving as millions of people get vaccinated around the world. Revolve's stock trades for roughly 5 times sales and 53 times earnings, suggesting that the market expects substantial bottom-line improvement in the future.
Betting on digitization
Companies don't grow explosively by doing the same thing as everyone else, and the digital strategies of DraftKings and Revolve Group help them to stand out in their industries. Both stocks could potentially turn a $500 investment into significantly more money over the long term.
