The broader market is again flirting with all-time highs. But many investors, including myself, are sitting on some substantial losses in 2021 because several popular growth stocks have pulled back and are slumping to 52-week lows. If your portfolio is down, a word of caution: The pain of losing money can embolden us to make reckless investing decisions. Don't sell your financial future while looking for short-term explosive opportunities.
This doesn't mean that explosive opportunities aren't out there; they are. And I believe Zoom Video Communications (ZM 3.49%) and Latch (LTCH -10.00%) are two such opportunities right now. However, as with most good investments, they might take several years to fully manifest. But the potential is there, as we'll see.
Image source: Zoom Video Communications.
1. Zooming out to see the big picture
You're probably aware that Zoom Video Communications provides a popular videoconferencing tool. What you might not know is that the majority of its revenue is derived from enterprises, not everyday consumers like you and me. As of the third quarter of its fiscal 2022, Zoom had over 2,500 enterprise customers that had each contributed over $100,000 in trailing-12-month revenue, up 94% year over year.
Zoom is great because it sells a subscription product, not a usage-based product. Many companies were forced to start using Zoom in 2020 because of the COVID-19 pandemic. But even as employees begin returning to the office and use Zoom less, companies will likely still find it useful to have. Therefore, they'll keep paying for their Zoom subscriptions. To date, Zoom isn't losing customers; rather, its overall customer count continues to increase quarter over quarter.
The stock market doesn't see it this way -- conventional wisdom says that Zoom's days are numbered as the end of the pandemic seems to be drawing nigh. That's why this stock has been falling for 14 months and is now down almost 70% from its all-time high. The good news for investors today is that Zoom stock now trades at its cheapest valuation ever, at just under 15 times trailing sales. That's why it's a good buy in December.
ZM data by YCharts.
Here's why it might make an explosive investment: Zoom can keep growing. Going into the new year, its Phone and Rooms products are going to become the company's focal points. These products modernize office spaces. And currently, only 5% of Zoom's customers use Rooms and only 4% use Phone. This means the company has a clear opportunity to grow within its existing customer base, to say nothing of new customers. And these customers might be motivated to upgrade as workers return to the office, making Zoom a counterintuitive reopening stock.
This explosive opportunity could already be playing out, considering Zoom Phone grew more than 100% year over year in Q3. Once the market realizes it gave up on Zoom too soon, I expect the stock to return to long-term, market-beating returns, especially rewarding those who buy now.
Image source: Getty Images.
2. Latch: Unlocking the door for big-time upside
Latch sells smart-lock devices to landlords for their residential apartments and commercial spaces. Tenants then pay an ongoing fee to Latch for the operating software on the locks. Revenue growth looks good -- through the first three quarters of 2021, revenue is up 154% from the comparable period of 2020. However, the company also racked up a net loss of $112 million on just $27 million in revenue. The market simply finds this cash burn unacceptable. And that's why the stock price is down almost 50% from its high, flirting with an all-time low right now.
I disagree with the market on this one; I believe Latch is a great business. Consider that as of the third quarter, it had over 500,000 cumulative booked homes -- doors under contract that are expected to be equipped with a smart lock in the next two years or so. According to the company, landlords can simultaneously increase revenue and decrease expenses by using Latch. So I believe this contracted backlog will come to fruition, given the clear value proposition to landlords.
The problem is that this is taking longer than anticipated because labor shortages are causing construction delays: Most Latch products are installed in new builds. However, this is a problem that should work itself out in time. Either construction projects will speed back up, or they'll continue at a snail's pace -- but Latch products are in demand and will be installed either way. The question isn't "if" but "when."
However, the market is impatient, and that's why I believe you should buy Latch stock in December with patient expectations. Because when Latch's hardware is eventually installed, it can begin generating high-margin software revenue of between $7 and $12 per month per door. And the dramatic shift from cash-burning hardware revenue to free-cash-flow-generating software revenue will likely catch Wall Street by surprise, creating an explosive opportunity.
Latch's smart locks are just a way to open a door to greater possibilities. Once inside, the company not only expects to generate revenue from its operating system but also plans to offer ancillary renter services, including insurance. With a market capitalization of just $1 billion, Latch stock has plenty of room for market-beating upside as these opportunities are captured.
Don't forget that January's coming
Zoom and Latch are two great stocks to buy in December and hold for the long term. But I also believe one of the best things any investor can do is to keep investing in January and beyond. Over short time periods, we don't know what the market is going to do. And by next month, both Zoom and Latch could have fallen further.
That's why it's important to keep investing little by little. By making plans to dollar-cost average our portfolios over time, we can leverage market volatility to our advantage, by guaranteeing we aren't investing all of our money at the top.
