Not all growth stocks are created equal, and there are three that stand out to me as massive opportunities for investors because of the enormous markets they are in. Each could end up defining a very valuable industry, disrupting existing players along the way.
The stocks I'm talking about are streaming music and podcasting giant Spotify Technology (SPOT -4.97%); real estate company Zillow Group (Z 0.57%); and spatial-data company Matterport, which is expected to complete a merger with Gores Holdings VI (GHVI), a special purpose acquisition company (SPAC), sometime this quarter. These three growth stocks might be only scratching the surface of their potential.
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1. Spotify: Music to investors' ears
Spotify is known as a music streaming company today, but if this is going to be a growth stock, it's going to be because of podcasts. The company has built a podcast platform that will enable it to match listeners with advertisers, creating a monetization option for creators -- and, in turn, Spotify.
Instead of listeners hearing the same ads over and over again, the future of podcasting is what's known as streaming ad insertion, which enables targeted ads within podcasts. Much like a Google search or your Facebook feed, advertisements will be based on what your personal interests are and the best ways for advertisers to reach you, which should maximize revenue per ad. Some of this revenue will be shared with the podcast creators. In an ideal world, Spotify becomes the best place to host and listen to podcasts.
We're a long way from the podcast business reaching maturity, but we're seeing progress. A total of 2.6 million podcasts are on the platform, and Spotify has acquired or partnered with a number of big names who will be exclusive to its podcast platform. On the listener side, the company has 356 million monthly active users, and management recently said that it's hitting all-time highs in podcast listening hours.
If Spotify attracts the podcasters (supply) and listeners (demand), it just needs to build out the advertising infrastructure to generate more revenue. The company's ad tools are improving, and I think we're likely to see the podcast ad business pick up quickly.
SPOT revenue (TTM) data by YCharts. TTM = trailing 12 months.
It's early, but ad-supported gross margin improved 1,100 basis points in the first quarter to 4.4%, which is low but improving quickly. If margins continue to improve and revenue per podcast picks up, this could be a steal of a stock for long-term investors. The stock is trading for under five times revenue, and revenue is growing by double-digit percentages even before podcast growth picks up.
2. Zillow: Upending real estate
The home real estate business has been virtually unchanged for most of the last century, with real estate agents sitting between buyers and sellers and charging a high fee to connect the two. They do this because there's asymmetric information when it comes to market pricing, process, and what homes are available in the market (think Multiple Listing Service). But Zillow is upending that status quo.
Its start came as a nationwide housing database with more information about homes and values than users had ever seen. The user base grew as data within Zillow's app increased, and real estate agents saw that as a great way to reach qualified customers looking for new homes. That led to the rise of the Zillow Premier Agent business, which is essentially advertising for agents. It is its most profitable segment and really drives the bottom line today. But this isn't what's upending real estate long-term.
If you look at Zillow's results today, the company generates most of its revenue from Zillow Offers, not agent revenue. Zillow Offers actually buys and sells homes, intending to provide a low-friction way to sell a home at a competitive rate. There's no dealing with showings or the cost of staging -- simply sell to Zillow and it will handle the sale process. In the first quarter of 2021, Zillow Offers generated $701 million in revenue out of $1.22 billion overall for the company.
Long term, the vision would be that Zillow can offer a more compelling price than by listing a home through traditional methods because it'll be able to optimize prices and lower transaction costs. Zillow can cut out real estate agent fees and advertising costs as well, which could ultimately make the company the best buyer in the market for most homes.
Given how crazy the housing market is right now, Zillow Offers might not be generating the volume investors hope for. But it's the kind of long-term disruption real estate needs. And if it can upend the housing market that has a value of $36.2 trillion (according to Zillow), the company has a lot of room to grow from its current $29 billion market cap.
3. Matterport: Spatial data made easy
Speaking of real estate, technology has made it easy to take pictures of homes and share them when selling a house or planning a renovation project, but the spatial data that includes the size of rooms, how furniture will fit, where pipes are, and other information has been elusive -- until now.
Matterport is a spatial-data company that will create a 3D "dollhouse" of a home or commercial building with nothing more than scans made by a smartphone. The company offers higher-end cameras, but the technology is now so simple that it can be done with common devices like most smartphones.
The value for users can be found in many diverse markets. Scans can be used for selling a house, planning renovations, leasing commercial space, managing apartment buildings, and much more. Matterport is the spatial hub, and with APIs, it's allowing partners to build value-generating tools on top of the data.
Matterport is relatively small today, but it's dominant in the spatial real estate business and is growing like crazy. In the first quarter of 2021, the company increased revenue 108% to $26.9 million; spaces under management rose 88% to 4.9 million. It is potentially a disruptive and value-add technology in multiple real estate businesses, and I think it will be standard a decade from now, which is why investors should get in now.
Buying into long-term growth
Each of these companies is disrupting or creating very large markets and has leadership positions established. If they succeed in translating disruption into a big business, they could be big winners for investors. That's why these are three stocks I would back the truck up for today.
