Financial technology pioneer PayPal Holdings (NASDAQ:PYPL), flooring specialty retailer Floor & Decor Holdings (NYSE:FND), and advertising technology (ad-tech) company Magnite (NASDAQ:MGNI) are three stocks that have more than doubled over the past three years. And looking forward, I believe they can double (and more) again.
Whenever investors see a swift run-up like what PayPal, Floor & Decor, and Magnite have enjoyed, they think it's too late to invest. However, many times this isn't true. As we'll see, these three companies have tons of great growth ahead of them that could result in market-beating returns over the long haul.
1. PayPal: Trusting an impressive track record
Here's my investing thesis for PayPal stock today: Digital financial transactions continue to replace cash money in our day-to-day lives. I believe that PayPal stands to grow its user base substantially from where it is today, and these users will be more engaged going forward. And by collecting and analyzing consumer data from their transactions, I believe PayPal can both attract merchants to the platform and offer them services to improve their businesses.
For the record, parts of this investing thesis aren't original to me. I got them from PayPal management's five-year plans. Earlier this year, management said it anticipates having 750 million active accounts by the end of 2025, as compared to 416 million active accounts at the end of the third quarter of 2021. And it expects to process over $2.8 trillion in total payment volume (TPV), as compared to $1.2 trillion over the past 12 months. That's a lot of growth.
The TPV forecast suggests an increase in user engagement over the next five years. And as users transact more through PayPal's services, the company will have consumer data that it can collect, compile, analyze, and package to its merchant customers. Right now it has 33 million merchant customers, and I'm sure many more would willingly pay for data to better serve hundreds of millions of consumers.
My thesis for PayPal stock reflects trust in PayPal's management. But this isn't blind trust. Since going public in 2015, management has built a track record of accomplishing what it sets out to do. And since presenting its five-year plan to investors, active accounts and transactions per account have increased in line with expectations. Therefore, the 2025 plan is credible in my opinion. And if accomplished, I expect PayPal stock could double (or more) from where it trades today.
2. Floor & Decor: Welcome Berkshire Hathaway!
On Nov. 15, Warren Buffett's Berkshire Hathaway disclosed that it had purchased shares of Floor & Decor for the first time. With just over 800,000 shares, this is a relatively small position for Berkshire Hathaway. But this conglomerate is known for looking for value stocks with high cash flow potential. Therefore, the position is a vote of confidence in this business.
I personally became a shareholder in Floor & Decor two years ago, holding a simple thesis. The company has expanded quickly and profitably, and it's grown in popularity in recent years. Moreover, the management team is experienced (three executives came from Home Depot) and has big goals over the next decade. Therefore, I believe this story can continue playing out.
From 2016 to 2020, Floor & Decor more than doubled its store count, but it still only has 153 locations as of the third quarter of 2021. Long-term, it sees an opportunity for 400 locations, and it's willing to grow its store count by 20% annually to get there.
Considering Floor & Decor stores are growing in popularity, opening more makes a lot of sense. To measure popularity, we can look at comparable sales -- comparing sales from existing stores from one year to the next. In 2020, Floor & Decor's comparable sales increased 5.5%, marking its 12th consecutive year of positive comparable-sales growth. And comparable sales have been positive in all three quarters of 2021, meaning it'll likely notch its 13th consecutive year this year.
Floor & Decor stock trades at a price-to-earnings ratio of around 50, which doesn't exactly scream value. However, as the company continues its profitable expansion, I believe it's fair to say it will be far more valuable than it is today. And at maturity, it can start returning profits to shareholders, which is likely something that Berkshire Hathaway is thinking about.
3. Magnite: A top dog in a high-growth space
In the third quarter of 2021, Magnite grew its revenue 116% year over year. But before you get too excited, understand that the growth rate is only this high because it's made acquisitions, boosting its revenue. Accounting for these additions, its Q3 growth rate was 26% -- more modest but still respectable.
I highlight this detail from Magnite's Q3 results to say this: Magnite has made acquisitions and has become the largest independent supply-side ad-tech company there is. And being the top dog has its benefits. Large publishers are more likely to partner with a company that has Magnite's scale.
This is exactly what's happened. According to eMarketer, Disney's Hulu is the top connected-TV (CTV) channel by ad revenue. Roku, Pluto, and Tubi are also in the top five. And these four are all Magnite customers.
Research organization GroupM expects CTV global ad revenue to nearly double by 2026. Magnite's management has laid out its own market-share goals over the next few years, which leads me to believe the company's business could double or more as it captures this outsized industry growth.
Just one stock today?
While I think PayPal, Floor & Decor, and Magnite could all double in value over the next few years, I'd rank Magnite as the riskiest of the three. Mergers and acquisitions often don't pan out as well as hoped, and these additions are still recent. So while my conviction for Magnite remains high, I do acknowledge this risk.
Perhaps the safest bet of the three, in my opinion, is Floor & Decor stock. Consider that the U.S. Remodeler Index hit 75 in September -- anything above 50 communicates strong confidence from professionals about the state of the home remodeling market. It's just a single data point, but it exemplifies my belief that Floor & Decor's products will stay in hot demand for the foreseeable future.