Almost all investors know about the technology giants that dominate the business world. Stocks like Apple, Amazon, and Alphabet have been strong performers that investors have been able to ride to great heights over the last decade-plus.
But what about the next generation of technology stocks? The top performers of the past will not necessarily be the best stocks to own tomorrow, and investors should always be on the lookout for new potential compounders to add to their portfolios.
Wix.com (WIX -0.30%), Vimeo (VMEO -0.56%), and Latch (LTCH 15.66%) are three top tech stocks with the chance to put up monster returns for shareholders. Here's why.
Image source: Getty Images.
1. Wix.com
Wix is a website-building platform for businesses of all sizes, as well as individuals. It has two segments: creative solutions, which is its core website-building platform, and business solutions, its e-commerce/payments service. Unlike its main competitor, WordPress, Wix offers a vertically integrated and code-less solution for building a website to simplify the process for anyone who isn't software savvy.
Customers (typically individuals or small businesses) pay Wix a monthly, annual, or multiyear fee for access to a domain name and its website-building tools. Revenue from these products goes under the creative solutions segment, which is where the company gets the majority of its sales right now. Last quarter, creative solutions' annual recurring revenue (ARR) hit $992 million, growing 18% year over year, as more customers join the Wix platform. This segment also has very high gross margins (76% last quarter), which indicates that at scale it will have very high net profit and cash flow margins as well.
On top of basic website building, Wix has launched a Shopify competitor that offers e-commerce and payments solutions for its customers. This is housed under the business solutions segment, which did $81 million in collections last quarter (revenue and change in deferred revenue), growing 53% year over year, and outpacing Wix's overall collections growth of 33%.
With tens of millions of small businesses and sole proprietorships around the globe, Wix has a huge market opportunity to go after, which could help it compound sales and profits at a high pace for many years. It does have some strong competitors in Shopify, Squarespace, WordPress, and others, which will be tough to win customers against. But with such a large market opportunity, strong unit economics, and a proven track record of success, Wix can be a great tech stock for your portfolio for the next 10 years and beyond.
2. Vimeo
Unlike Wix, which has been public since 2014, Vimeo made its debut on the public markets in 2021, after its spinoff from InterActiveCorp (IAC 0.86%). Vimeo was incubated in that internet conglomerate for many years, but management recently believed it was ready to be an independent company.
People might know Vimeo as an old YouTube competitor, but it has since retired that business. During that process it transitioned to offering a platform for businesses and creators to manage, create, and livestream video content.
Vimeo sells its video tools in subscription or bundled packages and has increasingly targeted large enterprises to power their internal video needs. For example, Vimeo counts Spotify and Amazon as customers, as even high-tech companies turn to the platform to help with remote-work onboarding and training. Last quarter, Vimeo's enterprise revenue grew 60% year over year, and it now has more than 6,000 enterprise clients.
The business' revenue is growing 33% year over year, and it has strong gross margins of 7% that should lead to high net profit margins as it matures. Vimeo currently has a small market cap of only $3 billion. If investors believe video solutions will become more widespread across industries with the rise of remote work and decentralized organizations, then this market cap could be a lot larger five to ten years from now.
3. Latch
Lastly, we come to Latch, a company with less of a proven business model than Wix or Vimeo, but still with an exciting technology solution and a large market opportunity. The company, which was founded less than a decade ago, sells a software/hardware solution to residential and commercial buildings to help manage and secure their spaces.
It works like this: Latch approaches a property developer building a new apartment complex and signs a long-term contract to install Latch's products in it. These include smart doorknobs, which will go on every apartment unit and public door in the building, plus Latch's software program, which helps managers monitor the building. The hardware is connected over the internet to the company's software management program, giving managers real-time insights into what is happening in the building. Tenants use Latch through its mobile application, which allows them to easily enter their apartments without the need for keys.
Because of the time and money, it saves the apartment developers, and how secure a building is, Latch is able to charge $7 to $12 per unit per month to the building owner for access to its software. With high switching costs, this makes Latch's revenue highly predictable once it is installed in the building.
Latch is still in its early days from a revenue standpoint, only generating $11 million last quarter. However, it has a huge pipeline of buildings coming online in the next three to five years, which gives it strong visibility into future revenue growth. For example, in the third quarter, Latch reported $96 million in bookings, which is the amount of future revenue that its team signed under contract in the period.
This early stage of Latch's business brings quite a bit of risk for investors. But if you think the software/hardware bundle can continue to grow in popularity in apartment buildings across the world, Latch could be doing much more than $11 million in quarterly revenue a decade from now.
