We're halfway through 2021, and it's been a wild year on Wall Street that's been punctuated by quite the movement from retail investors. Though retail investors have been putting their money to work on Wall Street for a long time, they've moved equities in the first six months of 2021 like never before.
In particular, retail traders have been buying shares and out-of-the-money call options in stocks with very high levels of short interest, with the purpose of effecting a short squeeze. In simple terms, traders are looking to send the share price for these volatile momentum stocks "to the moon."
While I don't disagree that a company's share price can be proverbially sent to the moon, I don't see any of the so-called Reddit stocks getting there. If you want to own companies with tangible growth potential that can truly go to the moon, the following trio of surefire stocks may be for you.
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Sea Limited
The first thing you should understand about stocks with capacity to moonshot is that they can be big, as well. Singapore-based Sea Limited (SE -0.80%) has a $143 billion market cap, but could realistically make a run at $1 trillion down the road if its three fast-growing segments keep blowing expectations out of the water.
For the time being, Sea is generating all of its positive earnings before interest, taxes, depreciation, and amortization (EBITDA) from its gaming division. When the first quarter came to a close, Sea had 648.8 million quarterly active gamers, 12.3% of which were paying to play. That's well above the industry average, and is up significantly from the 8.9% that paid to play in the year-ago quarter. While some of this growth is likely due to people being stuck in their homes by the pandemic, it's pretty clear that Sea's mobile games are resonating with users.
What should really have investors excited is the company's online shopping app, Shopee. It's the most-popular shopping app downloaded in Southeastern Asia, and is quickly gaining steam in Brazil. Even though the pandemic has lifted online ordering, we've been seeing gross orders and gross merchandise value (GMV) soar for years, well before the pandemic took shape. The March-ended quarter saw gross orders rise 153%, with GMV more than doubling to $12.6 billion. For context, that's more GMV than Shopee did in the entirety of 2018. Shopee should be the company's biggest growth driver this decade, and may well help Sea quintuple its sales over the next four years.
And third, Sea has its burgeoning digital financial services segment. Since many of the fast-growing emerging markets Sea operates in have regions that are underbanked, it's offering digital mobile wallet services to residents. According to the company, it has more than 26 million paying customers and logged $3.4 billion in mobile wallet payments in the first quarter. It's a nascent segment, all things considered, but it could prove incredibly important for the Sea growth story as time moves on.
Sea may be big, but it can make waves and head to the moon.
Image source: Getty Images.
Root
When you think of stocks that go to the moon, insurance companies are a good bet not to be on that list. That's because the insurance industry tends to be slow-growing and predictable. However, one company, Root (ROOT 0.59%), is looking to shake up how things are traditionally done, and that could lead to its share price eventually rocketing to the moon.
Today, when drivers purchase an auto insurance policy, they're essentially being judged by factors such as their age, marital status, credit score, and whether they have other policies in place with a particular insurance company. In other words, these aren't factors that really tell insurance companies if a person is a good driver or not. Root is changing things up by relying on telematics.
Essentially, the company is collecting copious amounts of data from the sensitive instrumentation in smartphones (e.g., accelerometer and gyroscope) to measure factors like G-forces in braking, turning, and accelerating. By throwing out broad-based criteria like credit scores and replacing it with real-world driving data, Root believes it can offer more profitable policies at a better price for drivers.
How's it working? During the first quarter, Root wrote $203 million in premium and saw its direct accident period loss ratio fall to 77%. Any figure below 100% represents a profitably written policy. That's a 128% increase in direct written premium from the first quarter of 2019, and its direct accident period loss ratio is down from 106% from the same quarter two years ago. It may be early, but the telematics-based approach looks to be working really well.
Mind you, Root will likely be losing money for years to come as it boosts headcount, reinvests in and refines its dynamic pricing platform, and leans on marketing to get its name known to drivers. But given these encouraging early signs, as well as Root's ability to scale its platform to new insurance verticals, Root could very easily launch into orbit.
Image source: Getty Images.
The Original BARK Company
A third surefire growth stock with some serious "paw-tential" is The Original BARK Company (BARK 3.42%), which recently went public via a special purpose acquisition company (SPAC) merger. BARK provides dog-focused products primarily through online subscriptions.
Never, ever, underestimate the power of pets and an owners' willingness to spend a small fortune on the well-being and happiness of their four-legged friends. This year, the American Pet Products Association is estimating that $109.6 billion will be spent on companion animals in the U.S., with food and treats comprising the single-largest component at $44.1 billion. It's been a long time since spending on pets declined year-over-year, which makes the companion animal industry virtually recession-proof.
What's intriguing about BARK, which you may know better as BarkBox, is the company's operating model and its innovation. Tackling the former, BARK primarily operates as a recurring subscription service. Even though the company has its products in approximately 23,000 retail doors, operating as an online company helps to reduce overhead expenses and has lifted its gross margin to around 60%. BARK ended March with 1.2 million subscribers, which nearly doubled where it was the previous year.
There's also clear-cut innovation driving BarkBox's growth. While the company's core toy and treat deliveries each month are likely to remain big revenue drivers, the introduction of Bark Eats and Bark Home will create high-margin add-on sale opportunities and potentially improve brand loyalty. Bark Eats works with pet owners to craft a customized and deliverable dry-food diet for their pooch. Meanwhile, Bark Home is a destination for basic-need goods like bowls, leashes, collars, and dog beds.
Though early, initial estimates on Wall Street have BarkBox tripling its sales between fiscal 2022 and fiscal 2026 to $1.5 billion. If this proves accurate, BARK could be the steal of 2021, and it would have a very good shot of going to the moon.
