The pandemic-accelerated digitization of the global economy has brought to the forefront several new avenues for wealth creation.
While rising inflation and anticipation about the Federal Reserve increasing interest rates have made short-term investors jittery, it is not that big of an issue for long-term investors. Historically, investors who have managed to remain patient through sell-offs and market corrections have benefited dramatically in the long run from the stock market's power of compounding.
If you have $10,000 in capital that is not needed for paying bills or setting up an emergency fund, then the following digitization-driven stocks could help you increase this investment to $50,000 by 2030.
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1. Skillz
Shares of online mobile gaming platform Skillz (SKLZ 2.04%) have declined by 30.2% in the last month. However, this pullback presents a unique entry opportunity to buy shares of this high-margin and no-debt gaming company.
Skillz operates a software platform that hosts several games of skill (and not of chance) from multiple game developers. By not hosting games of chance, the company has managed to reduce its regulatory challenges associated with the likes of daily fantasy sports and online sportsbooks. This gaming platform stands out from the competition because players can wager on these games for cash prizes, making them more attractive than free-to-play games. The company charges 15% of the gross proceeds paid by players for its services.
The software platform has demonstrated high scalability, which is apparent from the company's trailing-12-month gross margin close to 95%. Skillz is now focused on adding more multiplayer turn-based games and is investing in synchronous technology (allowing multiple players to play simultaneously) to add more profitable games, such as first-person shooters and real-time strategy games. The expansion of its gaming portfolio, both in the number of games and genres, increases the chances of delivering several hits, which in turn can improve the company's financials.
With second-quarter earnings scheduled for Aug. 3, the short-term share price trajectory will depend on factors such as whether the company surpasses analysts' estimates, changes in its fiscal 2021 outlook and paying user base, and future developments in international market expansion and partnerships. However, in the long run, the company has solid potential to increase its paying user base since it currently accounts for only 17% of the total user base. The recent acquisition of demand-side advertising platform Aarki is expected to reduce the company's customer-acquisition expenses and, subsequently, its losses. The company's multi-year gaming agreement with the National Football League will also help in attracting new users at much lower costs.
Against this backdrop, the stock seems to be well-positioned to emerge as a wealth generator in the coming years.
2. Cloudflare
Another game-changing stock that can easily turn $10,000 to $50,000 by 2030 is the leading edge-based content delivery network and cybersecurity player, Cloudflare (NET +0.14%). The company is positioning itself as "Cisco-as-a-service," wherein a software-based network service is used to replace all types of network hardware such as routers, firewalls, VPNs, and load balancers. Cloudflare currently offers network services in over 200 cities and 100 countries.
With edge-based network architecture allowing for data and computations to be performed at a localized data center closer to the user instead of a centralized data center, Cloudflare's network is inherently fast, reliable, and more secure. The company's software-defined networking (SDN) model has made its network highly scalable and cheaper than the hardware-based networks of peers such as Akamai Technologies and Limelight Networks. Cloudflare now expects its total addressable market to expand from $72 billion in 2020 to $100 billion in 2024.
The company's freemium strategy of offering its services free to individual users and then leveraging the insights to develop premium-priced products for enterprises has been paying rich dividends. At the end of the first quarter (ending March 31, 2021), the company's total customer count (free and paying customers) rose 46% year over year to 4.1 million, while its large customer count (annual spend of more than $100,000) was up 70% year over year to 945.
The large customer cohort has emerged as the fastest-growing cohort and accounts for more than half of the company's total revenue. In addition to acquiring new customers, Cloudflare's existing customers are also purchasing more of its products as evidenced by the first-quarter dollar-based net retention rate of 123% (the same customers have spent 23% more dollars in the first quarter as compared to that spent in the same quarter of the prior year).
Cloudflare is currently guiding for fiscal 2021 revenue of $612 million to $616 million, implying a 42% year-over-year rise at the midpoint. The company is not yet profitable, but financials are trending in the right direction. Based on a highly scalable SDN model, large addressable market, and a partnership with Nvidia to imbibe artificial intelligence capabilities in its edge network, Cloudflare is a solid long-term pick for retail investors.
Image source: Getty Images.
3. Sea Limited
Singapore-based Sea Limited (SE +0.69%) has been rapidly expanding its three business segments -- e-commerce (Shopee), digital entertainment (Garena), and digital financial services (SeaMoney and ShopeePay) -- in Southeast Asia, Taiwan, and Latin America.
Digital entertainment (involving game development and publishing) is the only profit-making business and the main source of cash flow for the company. The strength of Sea's gaming portfolio is apparent, considering that its internally developed game Free Fire was the most downloaded game in the world in 2020. Besides Free Fire, the company also distributes several of Tencent's (TCEHY +1.11%) popular games. While Sea pays royalties to Tencent, this distribution activity has also helped expand the company's gaming user base. The company's quarterly active users of digital entertainment soared by 61% year over year to 648.8 million, while quarterly paying users rose even faster at 124% year over year to 79.8 million at the end of the first quarter (ending March 31, 2021).
With the gaming business helping control its overall losses, Sea has been focusing on expanding the market share of its e-commerce platform Shopee. While not yet a profitable venture, gross orders on Shopee jumped 134.6% year over year to one billion and gross merchandise value of orders processed on the platform rose year over year by 112.5% to $11.9 billion in the first quarter. Shopee continues to dominate the Indonesian e-commerce sector, which is expected to grow faster than the Indian e-commerce market. In the first quarter, App Annie ranked Shoppe as a leading app on Android platforms in Southeast Asia and Taiwan in the shopping category based on average monthly users and total time spent. Shopee is also making rapid inroads in Brazil.
Finally, although digital financial services are currently a small part of Sea's revenue mix, it is growing at a fast pace. In the first quarter, quarterly paying users for the company's mobile wallet were up 145% year over year to over 26.1 million.
Against the backdrop of a diversified business model benefiting from several structural tailwinds, Sea Limited offers an attractive risk-reward proposition to retail investors.
