At the start of 2020, I had no idea the market was about to have one of the sharpest and fastest drops in history. Then at the end of March 2020, I had no idea the S&P 500 was about to go up 56% over the next year -- an incredible 12-month run. And when looking at individual stocks, there's plenty of short-term moves that have surprised me over my investing career.
The stock market can be volatile and unpredictable in the short term -- and seemingly more so lately. This problem has a solution: Invest for the long term.
Of course, it's hard to invest for the long term because innovation, disruption, and change happen fast. However, I believe some secular trends are so big they're unstoppable. And PayPal Holdings (NASDAQ:PYPL), Redfin (NASDAQ:RDFN), and The Trade Desk (NASDAQ:TTD) are three companies riding some of these unstoppable trends.
1. PayPal: The digitization of commerce
E-commerce may seem like a trend that's already played out. But consider that just 14% of retail sales in the U.S. came from e-commerce in 2020, according to the U.S. Census Bureau. That's up from just 11% in 2019, demonstrating ongoing adoption and a still large opportunity.
By the same token, cashless transactions may seem like an old trend. We're using physical cash less and less as we shift to digital everything. However, this trend still has legs as well. Consider one aspect of digital money: mobile payments. According to Mordor Intelligence, mobile payments are expected to grow at a 24.5% compound annual growth rate (CAGR) worldwide between now and 2026. That's massive.
I combine e-commerce and digital transactions into one megatrend: the digitization of commerce. And PayPal is sitting right in the sweet spot.
PayPal is known for helping pioneer digital payments online. But just in the past year it's added new services like buy now pay later, check cashing, and cryptocurrency services. All of these new services are designed to increase its total market opportunity. And with this expanding ecosystem, management believes it's on a path to 750 million active users and $50 billion in annual revenue by 2025 -- up from 377 million and $21.5 billion at the end of 2020.
There are two sides to PayPal's business. One is the consumer side, which is where many new services have launched. But with these new products, PayPal is amassing a treasure trove of consumer data that it can use to better serve the merchants on the other side of the business. Given the advantage it has from the size of its customer base, I believe PayPal is one of the best-positioned fintech companies as the digitization of commerce trend keeps playing out over the next five years and beyond.
2. Redfin: Technology-enhanced real estate
Nearly two-thirds of homebuyers made an offer on a home without seeing it in 2020, according to a survey by real estate company Redfin. When you think about real estate, it's historically been dominated by in-person home tours, sit-downs at brick-and-mortar banks, and stacks and stacks of paperwork. But this amazing stat from Redfin points to a profound shift taking place -- homebuyers increasingly rely on technology to complete real estate transactions remotely.
Anecdotally, I've personally experienced the advantages technology offers with real estate, having toured a home with my agent via video from Zoom Video Communications before placing an offer. And even though I was in another state at the time, I was still able to move quickly by signing the majority of my paperwork with DocuSign. Therefore, there are many ways tech is enabling a revolution in real estate.
Redfin is a tech-first real estate company. Through the app, homebuyers can schedule a virtual home tour with an agent. Moreover, the company offers ancillary services like loan origination and title services to ensure a speedy process. But here's why Redfin is a great way to ride the tech trend in real estate: It's changing the rules of the game by tinkering with real estate agents' pay structure.
Typically, commissions for real estate transactions are 5% to 6% of the purchase price and split 50-50 between the buyer's agent and the seller's agent. However, Redfin's agents are paid salaries plus incentives. If you sell with Redfin, the seller's fee is only 1%. And if you buy another house within a year with Redfin, the buyer's fee is also only 1%, saving consumers thousands of dollars.
The real estate market is ripe for disruption, and Redfin has tech tools to play a part in this disruption. And with a clear value proposition for consumers, I wouldn't bet against this growth stock. Indeed, since the company went public in 2017, it's nearly doubled its market share for home sales.
3. The Trade Desk: Measurable results for advertising
Advertising budgets are increasingly shifting from traditional sources (think linear TV and print newspapers) to digital media. According to estimates from Statista, total U.S. advertising spend fell roughly 7% year over year in 2020. Nevertheless, digital advertising spend grew 12.2% during that time, according to data from The Interactive Advertising Bureau (IAB). These two stats combined show the degree of the acute shift toward digital advertising.
A subset of digital ads is programmatic advertising -- ads that can be more directed toward specific individuals. Again, according to IAB, programmatic ads grew a whopping 25% in 2020. Programmatic ad-tech company The Trade Desk was a big beneficiary of the shift. Spending on its platform was up 34% year over year to $4.2 billion in 2020.
Why are advertisers turning to The Trade Desk? A 19th-century businessman named John Wanamaker is credited with saying, "Half the money I spend on advertising is wasted; the trouble is I don't know which half." I believe this witty quote is as true now as it was then -- businesses need measurable results when evaluating their advertising budgets. Wanamaker would have loved The Trade Desk's technology -- it allows advertisers to target specific demographics on specific types of media (like connected TV) to ascertain exactly where spending is paying off.
Programmatic ads are better for businesses because they can be measured. But more than this, consumers are increasingly engaging with digital media, so advertisers have to go to where the eyeballs are. One example of this is connected TV (CTV). More than ever, people are canceling traditional pay-TV sources in favor of streaming video content. And because of this, ad budgets are increasing for CTV. According to eMarketer, CTV ad spend is expected to increase 54% year over year in 2021 alone.
The Trade Desk generated revenue of $220 million in the first quarter of 2021, up 37% year over year. And its top-performing category was CTV. I believe this company is delivering for its customers as evidenced by its 95% customer retention rate, and I think it's unlikely businesses ever revert back to the advertising methods used in Wanamaker's time. Therefore, The Trade Desk is riding an unstoppable trend and is worth a closer look now that the stock's down almost 50% from its all-time high.
With PayPal, Redfin, and The Trade Desk, riding unstoppable trends doesn't mean these stocks will rocket straight up in the coming weeks and months. But I'm confident these companies have a growing market opportunity for the foreseeable future from which they can create value for all their stakeholders.