The stock market is one of the best vehicles for generating strong investment returns, but every now and then it presents opportunities to make truly life-changing wealth. The stock of e-commerce giant Amazon, for instance, has grown 205,000% since its public listing in 1997. A simple $1,000 investment at the time would've returned $2,050,000 to date.
Three Motley Fool contributors have identified Redfin (RDFN +0.00%), Latch (LTCH +8.95%), and Riskified (RSKD 0.67%) as the next potential hypergrowth opportunities to buy for the long term. Here's why.
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A multi-trillion dollar opportunity
Anthony Di Pizio (Redfin): When it comes to real estate, homeowners and prospective buyers avoid transacting without the help of an agent, because the process is incredibly complex and daunting. Most agents are either independent or work within small firms specializing in one geographical area -- and with listing fees as high as 2.5%, they can be quite expensive.
Redfin is disrupting the industry not by reinventing the wheel, but by building scale through thousands of employed agents. The company charges a listing fee of just 1%, and the business model has already saved consumers over $1 billion since the company's inception.
The U.S. real estate market is worth over $36 trillion with about $2.5 trillion in yearly sales, and since Redfin represents just 1.16% of all U.S. home sales right now, its opportunity is truly significant. The company's soaring revenue growth suggests consumers are finding value in what Redfin offers compared to traditional brokers.
|
Metric |
2018 |
2021 (Estimate) |
CAGR |
|---|---|---|---|
|
Revenue |
$486.9 million |
$1.88 billion |
56% |
Data sources: Redfin, Yahoo! Finance. CAGR = compound annual growth rate.
To put Redfin's growth into context, the overall real estate sales and broking industry is set to grow by just 0.4% in 2021, which indicates the company is snatching market share from the smaller outfits. The company's performance has undoubtedly been boosted by its growing iBuying segment, where it purchases homes directly from sellers and flips them for a profit, though its reliance on this is less significant than competitors like Zillow Group.
Redfin serves over 100 markets in the U.S. and Canada, with a recent expansion specifically into vacation hotspots like Big Bear Lake in Southern California, where the average home price might be significantly higher than a typical suburban area. But its largest opportunity could come in the form of a broader expansion into the $326 trillion global real estate market.
After all, its low-commission business model has served as a win-win for Redfin and consumers in the U.S., so there's no reason why it wouldn't do well overseas, too. Investors would struggle to find another company with a total addressable market this large.
Image source: Getty Images.
Opening the door to simple security
Jamie Louko (Latch): Looking for companies that can grow 100-fold is difficult, but if you're looking at Latch, you might be onto something. Latch provides smart locks that can enable guest and delivery management and smart access. What is more interesting, however, is its software that provides apartment managers with a bird's-eye view of all of their apartments. LatchOS -- Latch's software system -- allows apartment managers to monitor their apartments to ensure safety and security, allowing them to ensure that they are letting the right people in while keeping the wrong people out.
Three out of every 10 new apartments in the U.S. are being built with Latch, showing the widespread adoption, and considering the software is a monthly subscription per apartment, Latch is not dependent on acquiring new customers to continue growing rapidly. Latch already has over $96 million for hardware (lock) bookings and $60 million in software bookings, both of which grew 181% and 126% year over year from the third quarter.
Bookings represent agreements from managers to use Latch, but these agreements are made before the buildings are constructed. Once the building is built and tenants move in, the bookings become revenue, which can take up to 24 months. Latch has over 530,000 apartments booked and considering that only 2% to 3% of the agreements fall through, the future looks bright for Latch.
The major downside is the company's path to profitability. The company lost over $34 million in Q3 2021 -- three times its revenue -- and its total gross margin was just 4% for Q3, compared to a negative gross margin one year ago. The net loss has been decreasing in absolute terms and as a percentage of revenue over the past two quarters, but the road to profits is a long one. All of Latch's units that become operational will pay a subscription fee every month -- which has a gross margin of 90%. Therefore, most of the subscription revenue will fall to the bottom line, leading to strong profits.
While this path is promising, it will take a lot of excellent execution and time to achieve this. If it can, however, this $1 billion company could skyrocket, and a $100 billion valuation does not seem unreasonable. While there are plenty of risks with Latch, patient investors could be more than rewarded in a decade.
Image source: Getty Images.
Combating e-commerce fraud
Trevor Jennewine (Riskified): Over the last few decades, e-commerce has changed the world, and the industry is still growing at a rapid clip. Unfortunately, that beneficial technology has also made fraud more common. And legacy fraud management solutions often produce the wrong decision, meaning legitimate transactions are frequently denied (false declines) and illegitimate transactions are frequently approved. In either case, the merchant loses. That's where Riskified comes in.
This fintech company leans on big data and artificial intelligence (AI) to predict fraud more precisely. Riskified's platform integrates with its merchants' infrastructure more deeply than traditional solutions, such as those provided by other fintechs or financial institutions, allowing the company to capture hundreds of data points per transaction. Those variables are then measured against over 1 billion past transactions, allowing Riskified to automate the approval or denial process in real time with 99.8% accuracy.
Why does that matter? The top 10 merchants on Riskified's platform have seen revenue rise by 8% (due to fewer false declines) and fraud-related operating expenses fall by 39% (due to fewer illegitimate approvals). But other businesses have seen revenue rise by more than 20% and fraud-related charges fall by over 60%.
Not surprisingly, that value proposition has translated into solid top-line growth. In the third quarter, gross merchandise value (GMV) jumped 28% to $21 billion, and revenue rose 26% to $52.5 million. Also noteworthy, the company posted a gross retention rate of 117% in 2020, or 154% excluding merchants in the travel and ticket industries (i.e., sectors hit hard by the pandemic). That means Riskified's customers are spending more over time, evidencing the stickiness of its platform.
As a caveat, Riskified's gross margin dropped 7 percentage points to 46% during the most recent quarter, raising questions about the accuracy of its AI models. Specifically, Riskified assumes responsibility for all fraudulent transactions, meaning it reimburses merchants if illegitimate charges sneak past its platform. That expense is included in cost of revenue, meaning an uptick in fraud is likely behind Riskified's falling gross margin. Not surprisingly, the stock has fallen sharply in the last few days.
On the bright side, management noted that several large companies became customers during the quarter, and several of those customers operate in new industries. That means Riskified lacks industry-specific data to power its AI models in those cases. If that is indeed the cause, growth in gross profit should reaccelerate in the coming quarters. Shareholders should watch this metric closely.
That being said, I'm still bullish on Riskified. Its ability to boost revenue and reduce fraud-related charges creates significant value for merchants, and the company's market opportunity will only get bigger as e-commerce becomes more popular. More importantly, Riskified's GMV was just $60 billion in 2020 -- less than 2% of the $4.3 trillion that was spent online. Given that massive market opportunity, I think it's possible for Riskified to achieve a $175 billion market cap in the future, a figure that would represent 100x returns.
