There's little doubt that the best path to generating long-term wealth is investing in quality companies and holding them for years, if not decades. Achieving even an "average" stock market return still easily eclipses the rates offered by your neighborhood savings and loan. However, investors that are willing to do their homework can achieve significantly greater returns, hastening them along their path to financial independence.
Finding stocks with the right combination of a market-leading position, secular tailwinds, and a large and growing market can result in game-changing returns.
If you've got a sufficient emergency fund and $10,000 (or less) that you don't expect to need over the coming five to 10 years, here are three stocks that fit those lofty criteria.
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Twilio: Making in-app communications a breeze
An important lesson that was hammered home during the pandemic is the importance of keeping the lines of communications open. Whether customers want to call, text, or chat, making the process as seamless as possible can be the difference between success and failure. That's where Twilio (TWLO 1.08%) comes in.
The company provides communication technology that developers can embed directly into their own apps, without having to reinvent the wheel. Twilio's communications platform-as-a-service (CPaaS) is the industry standard, working behind the scenes to facilitate the processing of phone calls, texts, video, and chats -- all without ever leaving the app.
If you've ever experienced the real-time messages sent by food delivery services and rideshare providers, the text prompts to help reset your password, and the in-app conversations with customer service, chances are good they were powered by Twilio's technology.
Revenue growth accelerated in each of the past three quarters, capping off a stellar year for Twilio. Revenue jumped 65% year over year in the fourth quarter, while climbing 55% during 2020. The company's growing customer base helped fuel the results, climbing to 221,000, up 23% year over year. Not only that, but Twilio was able to expand its relationship with existing customers, as evidenced by its dollar-based net expansion rate of 139%.
Twilio isn't stopping there. Late last year, the company acquired Segment, expanding its footprint into customer engagement services. The move also significantly expanded the company's total addressable market (TAM), which management now estimates at $79 billion. Considering Twilio's full-year revenue in 2020 topped out at $1.76 billion, the company has a long runway for growth ahead.
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Roku: The future will be streamed
Streaming video pioneer Roku (ROKU 0.15%) was already scaling rapidly before the pandemic kicked its growth into high gear. The company developed a strong following for its agnostic and user-friendly streaming platform, but it's the company's connected TV operating system (OS) that put the company within reach of every living room in America. In fact, the Roku OS was found in 38% of smart TVs sold in the U.S. last year, while boasting a 31% market share in Canada.
The focus on growing its user base is bearing fruit. Roku's active accounts climbed to 51.2 million in the fourth quarter, making it the largest streaming platform in the U.S., outpacing Amazon's (AMZN -1.64%) Fire TV with 50 million. More importantly, Roku's growth is accelerating just as Amazon's is slowing, with year-over-year growth rates of 39% and 25%, respectively. With more than 10,000 streaming channels to choose from, Roku has something for every viewer, and this has customers flocking to its platform in record numbers.
It's important to note that Roku makes the lion's share of its revenue from digital advertising. The company gets as much as 30% of the advertising that appears on the ad-supported channels on its platform. Additionally, when a customer signs up for a streaming service on its platform, Roku gets a cut of the subscription.
Business is booming. While total revenue grew 58% year over year, platform revenue -- which includes revenue from digital advertising, The Roku Channel, and the licensing of its OS -- soared 81%, the highest growth rate since Q2 19. Its average revenue per user (ARPU) continues to grow at a healthy clip, up 24% year over year.
Roku is expanding its already sizable opportunity with the recent acquisition of Nielsen's Advanced Video Advertising business, which helps the company digitally replace the advertising from broadcast television feeds with more targeted spots. The move expanded Roku's estimated addressable market, which is projected to eclipse $769 billion by 2024. Considering Roku's revenue topped out at $1.78 billion last year, this could be just the tip of the iceberg.
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Datadog: A watchful eye in the cloud
There's little doubt the adoption of cloud computing accelerated over the past year, giving the digital transformation a big push forward. Monitoring these cloud-based systems has taken on greater importance than ever before, and extracting meaningful and actionable information is a key component of success. That's where Datadog (DDOG 0.50%) comes in.
The cloud-native platform-as-a-service (PaaS) provider gathers data from across a company's cloud operations, breaking down silos and compiling information neatly into a single dashboard. It also monitors both employee- and customer-facing systems to detect problems before they become critical and alerting developers to take remedial action. This can help prevent crucial and costly downtime.
Perhaps that's why Datadog was selected as a top choice for application performance monitoring by research company Gartner, which named the company one of the "Visionaries" for 2020 in its Magic Quadrant. Datadog was also recognized by developers in the 2020 Gartner Peer Insights Customers' Choice for Application Performance Monitoring, achieving a rating of 4.6 of 5 stars.
The respect of developers has helped fuel Datadog's reputation, as well as its financial results. The company's fourth-quarter revenue grew 56% year over year, and Datadog is edging ever closer to consistent profitability. The results were driven by robust customer metrics. Customers delivering annual recurring revenue (ARR) of $1 million or more grew 94% year over year, while those with ARR of $100,000 grew 46%.
Datadog is adding to its suite of services with the recent acquisition of Sqreen, which helps companies detect and block app-level attacks. The company also acquired Timber Technologies, which provides a single dashboard to collect observability data in one place. These acquisitions add to Datadog's large and growing addressable market, which management recently pegged at roughly $44 billion. The company generated revenue of $604 million last year, giving Datadog plenty of opportunity for growth ahead.
Data by YCharts
A word on valuation
Each of these three stocks has beaten the broader market by a significant margin over the past year, but the best could be yet to come. As such, each commands a premium valuation. Twilio, Roku, and Datadog are selling at 34, 28, and 18 times forward sales, respectively -- when a good price-to-sales ratio is generally between 1 and 2. It's also worth noting that none of these companies is consistently profitable, though Roku was in the black in each of the two preceding quarters.
Thus far, however, investors have been willing to pony up for the combination of market leading position, impressive top-line growth, and massive addressable markets. Given the size of the opportunities that remain, these high-growth stocks are likely just getting started.
