Since the beginning of 2020, investors have navigated their way through two historic events. First, there was the quickest decline of at least 30% in the history of the S&P 500 (it took about one month during the first quarter of 2020). This has been followed by the most robust bounce back rally from a bear-market bottom on record.
Yet despite the benchmark index hitting five dozen new record-closing highs in 2021, bargains still remain for opportunistic investors. The key is to seek out companies that offer game-changing innovation and hold onto your shares for many years to come.
If you have $1,000 ready to put to work in the market, which won't be needed to cover bills or emergencies as they arise, the following trio of game-changing stocks is perfect to invest in right now.
For more than a decade, Square's seller ecosystem has been its bread-and-butter growth driver. The seller ecosystem provides point-of-sale solutions to merchants, as well as analytics, loans, and software to help them succeed. In the seven years leading up to the pandemic, gross payment volume (GPV) transacted on Square's network grew by an annual average of 49% to $106.2 billion. Although merchant revenue has been a bit erratic due to the pandemic, third-quarter GPV of $41.7 billion implies an annual run-rate of almost $167 billion.
As I've previously pointed out, the most interesting aspect of the seller ecosystem is that it's no longer just for small merchants. In the September-ended quarter, $27.7 billion (66%) of the $41.7 billion in GPV originated from businesses with at least $125,000 in annualized GPV. That's up from 57% of GPV originating from businesses with more than $125,000 in annualized GPV in Q3 2019. Since merchant fees account for the bulk of seller ecosystem revenue, bigger merchants using its tools is a major plus.
However, most folks aren't invested in Square for its seller ecosystem. They're excited by the growth potential of digital peer-to-peer payment platform Cash App. In a three-year stretch, ended Dec. 31, 2020, Cash App's monthly active user count more than quintupled to 36 million. All the while, gross profit per user soared to $55 by the midpoint of 2021, compared to acquisition costs of just $5 per user. As you can see, the margin potential for Cash App is jaw-dropping.
Further, Cash App broadens the use case for Square beyond just merchant fees. For instance, Square is generating revenue from transfer fees as well as investments/trading activity. In particular, Cash App's revenue has soared as a result of Bitcoin trading and exchange.
The icing on the cake is Square's pending acquisition of buy now, pay later giant Afterpay, which was announced at the beginning of August. This deal will create a bridge between Cash App and the seller ecosystem that'll really allow Square's digital payment growth to ramp up.
When you think of game-changing stocks and industries, furniture companies probably don't come to mind -- and with good reason. Furniture companies are typically reliant on foot traffic to their brick-and-mortar stores and lean on third-party manufacturers for their showroom furniture. It's a stodgy business model that's ripe for innovation. That's where Lovesac (NASDAQ:LOVE) comes into play.
Lovesac isn't your traditional furniture company. It's not even traditional furniture. Although it was originally known for its bean-bag-styled furniture (known as "sacs"), approximately 85% of total sales now derive from modular couches, known as "sactionals." Since sactionals can be broken down and rearranged dozens of ways, they're designed to fit any living space.
Equally important to function are the options and story behind sactionals. Lovesac offers approximately 200 different machine-washable cover choices, meaning sactionals can fit with the color scheme or theme of any home. Plus, the yarn used in these covers is made entirely from recycled plastic water bottles. Approximately 966 plastic water bottles goes into the average sactional. That's function, choice, and ESG investing all wrapped up in one product.
Beyond design innovation, Lovesac is also a game-changer for leaning on its omnichannel presence to grow its sales. Whereas most furniture stores were at the mercy of the coronavirus pandemic and saw a dramatic drop off in foot traffic, Lovesac's sales soared. That's because it pivoted to online sales and used pop-up showrooms to a lesser degree. With a tendency to lean on direct-to-consumer sales, pop-up showrooms, and showroom partnerships, Lovesac's overhead is substantially lower than traditional furniture companies.
The end result is that Lovesac was able reach recurring profitability two years ahead of Wall Street's expectation and is still growing its revenue at an incredible clip (44% estimated sales growth in fiscal 2022 and 23% estimated growth in fiscal 2023). It's the perfect innovative small-cap stock for investors with $1,000 to buy right now.
The beauty of cybersecurity is that it's evolved into a basic need service. No matter how well or poorly the U.S. economy is performing, robots and hackers don't take a day off from trying to steal enterprise and consumer data. This is especially true with businesses moving their data into the cloud following the coronavirus pandemic. Over time, the onus of protecting this data is increasingly falling into the laps of third-party providers like CrowdStrike.
What makes CrowdStrike tick is the company's cloud-native cybersecurity platform known as Falcon. Since it was built in the cloud, Falcon tends to be nimbler and quicker to respond to threats than on-premises cybersecurity solutions. What's more, Falcon leans on artificial intelligence and oversees approximately 1 trillion signals per day. It's growing smarter at identifying and responding to threats all the time.
The proof of Falcon's effectiveness is plainly evident in CrowdStrike's operating performance. Over the past 4.5 years, the company's subscribing customers have grown from 450 to 13,080, with a gross retention rate that's effectively hovered at 98% for the trailing two years.
Arguably even more important, the number of customers with at least four cloud-module subscriptions has risen from sub-10% 4.5 years ago to 66%, as of the end of the fiscal second quarter of 2022. Having more clients add onto their initial purchase is what's helped propel CrowdStrike's subscription gross margin to the upper 70-percentile, which is essentially its long-term target.
CrowdStrike certainly isn't cheap at the moment, but its premium is warranted given how dominant the company's Falcon platform has been. Given five to 10 years, today's share price will likely be a bargain.