The Pareto Principle suggests that 80% of a portfolio's growth will be powered by just 20% of its holdings. In other words, a small number of investments will probably have an outsized impact on your total returns. That makes sense: Stocks can only fall 100%, but they can grow many times over in value, so any well-diversified portfolio is likely to have a few big winners.
Unfortunately, there is no surefire way to spot these monster stocks, but it helps to invest in companies with big market opportunities, strong competitive positions, and healthy top-line growth. Cloudflare (NET -0.49%) and Latch (LTCH) check all three of those boxes.
Here's why both of these stocks could grow many times over in the next decade.
Image source: Getty Images.
1. Cloudflare
Cloudflare is a cloud services provider on a mission to build a better internet. Its global network spans 250 cities and interconnects with 9,800 other networks, which positions its technology within 50 milliseconds from 95% of internet users worldwide. In turn, that system allows Cloudflare to make the internet faster and more reliable for its clients.
At the same time, Cloudflare's tremendous scale sets it apart from rivals like Akamai, a legacy content delivery network that (despite having a presence in 4,000 locations) interconnects with just 1,435 other networks. Generally speaking, more interconnections translates into better performance, which means that Cloudflare's network is faster. Ultimately, this means Cloudflare-powered content (e.g. websites, streaming video) loads more quickly, creating a better experience for end-users like you and me.
In addition to external-facing applications, Cloudflare also addresses its clients' internal infrastructure. For instance, Cloudflare for Teams is a zero-trust security platform that allows employees to safely connect to corporate resources (or the open internet) from any device or location. And Cloudflare One builds on that, supplementing zero-trust security with network services, accelerating performance across an organization.
In short, Cloudflare powers digital transformation, and that has been a significant tailwind for the company. During the most recent quarter, its customer base climbed 32% to 126,735, and revenue skyrocketed 53% to $152 million. Cloudflare also posted positive cash from operations of $7.5 million, meaning the company is generating sufficient cash flow to fund its business.
Looking ahead, Cloudflare is well-positioned to maintain that momentum. Management puts its addressable market at $100 billion per year by 2024, and with sales of just $530 million over the past 12 months, the company has captured less than 1% of that figure so far. More importantly, products like Cloudflare One and Cloudflare for Teams should be significant growth drivers as more enterprises lean into trends like cloud computing and remote work.
Cloudflare has a market cap of $52 billion today. But given its strong competitive position and massive market opportunity, I think that figure can grow fivefold over the next 10 years.
Image source: Getty Images.
2. Latch
Latch specializes in smart lock technology. Its LatchOS operating system powers an array of products, including first-party hardware like door-mounted access controls, intercoms, and delivery assistants, as well as third-party smart home devices like thermostats and light switches. In short, Latch is an end-to-end solution for smart buildings.
Why does that matter? Latch's ecosystem creates value for all parties involved. Residents benefit from convenience, as they can use the Latch mobile app to unlock doors, grant access to visitors, review access history, and control smart home devices. And the company recently launched LatchID, a product that consolidates a person's access permissions -- across apartments, managed garages, office buildings, and rental properties -- into a single account, further streamlining the experience.
On the flip side, Latch's cloud software enables property managers to control access permissions remotely, reducing the need for costly on-site staff. And the premium experience afforded by smart lock technology typically boosts apartment rental rates and reduces maintenance expenses.
More broadly, Latch's expansive ecosystem sets the company apart. The smart building industry is highly fragmented, and unlike Latch, many players either focus on a single aspect of the smart-building experience, or they rely on third-party hardware, forcing clients to stitch together incomplete solutions. That makes Latch's platform very appealing and very sticky. In fact, the company has never lost a single customer.
Latch went public by way of a special purpose acquisition company in June, but for a young business, its financial performance looks impressive. During the second quarter, revenue surged 227% to $9 million, and total bookings (i.e. agreements with not-yet-recognized revenue) jumped 102% to $95.8 million. The company currently operates at a loss, but with $472 million in cash and no long-term debt, Latch can afford to burn cash while it scales up.
More importantly, Latch's cumulative home unit bookings (i.e. all properties powered by Latch technology) represent less than 1% of apartment stock in the U.S., meaning there is plenty of room for future growth. That opportunity is made even larger by Latch's recent expansion into commercial office spaces. That's why I think this stock, which currently has a market cap of just $1.6 billion, can grow fivefold (or more) in the next decade.
