For over a century, the stock market has been one of the world's top wealth creators. While stocks might not outperform every year, equities have delivered a significantly higher average annual return relative to other asset classes.
But over the past decade, the supremacy of the market has been called into question by the returns of highly volatile cryptocurrencies. In particular, the popular Ethereum (ETH 2.27%) token Ether has returned close to 157,000% over the trailing six-year period. For some context, the S&P 500 produced a 23,454% total return, including dividends paid, in a 56-year stretch, ending in 2020.
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Not even Ethereum's popularity can save it if the crypto bubble pops
Back in early June, I anointed Ethereum as one of the two cryptocurrencies that I believe has the best chance to be a success. That's because the Ethereum blockchain utilizes smart contracts. These are protocols that facilitate, verify, and enforce the negotiation of a contract. Smart contracts can be used in financial and nonfinancial scenarios, giving Ethereum the ability to be a player in financial transactions, as well as a company that could revolutionize supply chain product tracking and management.
We've also witnessed incredible interest in the Ethereum blockchain by businesses. The Enterprise Ethereum Alliance (EEA), which is designed to promote the use of the Ethereum blockchain, now has more than 200 members. With blockchain lacking a real-world, large-scale use scenario, the EEA is a step in the right direction to broader-based adoption.
But for as much as I believe Ethereum can be a crypto survivor, I'm also a cryptocurrency skeptic. I strongly believe all digital currencies are in the midst of a massive bubble that's begun to pop, with a good likelihood of the Ether token getting dragged down with its peers. While the EEA is a start, the real-world application of blockchain remains extremely limited. In other words, the incredible run-up we've witnessed is unlikely to hold.
These fast-growing companies can easily outpace Ethereum
While I understand Ethereum is an incredibly popular investment, the following trio of high-flying stocks has a very good chance to run circles around the second-largest digital currency by market cap.
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Palo Alto Networks
When it comes to the most secure high-growth trends of the decade, cybersecurity may well take the cake. No matter how well or poorly the U.S. and global economy are performing, hackers and robots don't take a day off. As businesses move their own data and that of their customers into the cloud, they'll be increasing leaning on cybersecurity stocks like Palo Alto Networks (PANW 0.15%) for protection.
Palo Alto is a company that's in transition. Though it still sells physical firewall products, it's de-emphasized its physical security solutions in favor of subscription-based solutions. The big reason for this change is that providing cloud-based solutions allows Palo Alto to be nimbler in responding to potential threats. There's also considerably less revenue lumpiness associated with subscription services, compared to physical firewall products, and this shift should yield higher margins over time. Through the first nine months of fiscal 2021, 74% of total sales have come from subscriptions, up from 69% in the year-ago period.
Another key to Palo Alto's growth story is a steady diet of bolt-on acquisitions. Buying a number of smaller cloud-based security providers has helped expand Palo Alto's suite of services, as well as increased visibility to a larger swath of small-and-medium-sized businesses.
Taking into account organic and acquisitive growth, Palo Alto Networks shouldn't have any trouble sustaining a double-digit growth rate and handily outpacing Ethereum in the return column.
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Lovesac
Innovative small-cap furniture stock Lovesac (LOVE +1.41%) is another company that can run circles around Ethereum. Yes, I did just say furniture stock and referred to the company as "innovative."
One thing sets Lovesac apart from its competition is the company's furniture. Forget the idea that this is a bean bag chair (sacs) company. Today, more than 80% of Lovesac's sales are derived from sactionals -- essentially sectional-like modular couches that can be rearranged dozens of ways to fit any living space. Aside from the optionality of being able to reshape/rearrange its couches, Lovesac's sactionals offer over 200 cover choices. What's more, the yarn used in these covers is made entirely from recycled plastic water bottles. In other words, the core customer that Lovesac targets (millennials) is getting a piece of furniture that can mold to their living space, match the color scheme of their existing furniture and accessories, and is environmentally friendly.
The other aspect of Lovesac's exceptional success story has been its ability to adjust its operating model to match prevailing market conditions. Whereas most furniture retailers are brick-and-mortar-based, and therefore reliant on foot traffic into their stores, almost half of Lovesac's fiscal 2021 sales derived from online purchases, with another 7% coming from pop-up shops and shops within shops. Lovesac was already built around the idea of maintaining lower overhead than its peers. The pandemic simply taught the company how to lower its overhead even more while pushing to recurring profitability well before anyone on Wall Street had expected.
Lovesac may be just a furniture stock, but it's on track to potentially double its sales over the next four years.
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Intuitive Surgical
A third high-flying stock that could leave Ethereum eating its dust is robotic-assisted surgical systems developer Intuitive Surgical (ISRG +0.10%).
Innovation and personalized care is at the heart of what Intuitive Surgical is all about. Its da Vinci surgical systems are designed to replace traditional laparoscopic soft tissue procedures by minimizing incision size and hopefully shortening recovery time and the likelihood of complications. Through March, 6,142 da Vinci systems had been installed worldwide. This might not sound like a huge number, but it's more than all of the company's competitors on a combined basis.
Intuitive Surgical has quite the runway with which to pick up additional procedure share. Though da Vinci is already dominating urology and gynecology procedures, it'll likely become a bigger player in colorectal, thoracic, and general soft tissue surgeries throughout the decade.
But what makes Intuitive Surgical particularly special is that its operating model is built to generate higher margins over time. When the company began selling its systems two decades ago, these pricey systems accounted for the bulk of revenue. The thing is, they're intricate and costly to build, thereby yielding only mediocre margins. As time has passed, instruments and accessories sold with each procedure, along with the servicing of its systems, now makes up the lion's share of revenue. Both of these segments generate considerably higher margins. As Intuitive Surgical's installed base grows, so will its operating margin.
