Taking a simple buy-and-hold investing strategy on companies that have the potential to dominate the growing sector they operate in can definitely lead to life-changing wealth. If you had the foresight, for example, to buy $10,000 worth of Tesla stock a decade ago and held onto it till now, your buy-in would have grown to $2.1 million.
The difficulty here, obviously, is knowing which stocks to exercise this strategy on.
Two potential candidates that stand out as industry leaders with immense growth potential are Doximity (DOCS 0.97%) and DigitalOcean (DOCN 3.30%). Each has the potential to crush the market over the next decade, which is why it might be smart to consider buying these stocks and holding them for the long haul. Let's take a closer look at these two potential outperformers.
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1. Doximity: A doctor's super-app
Doximity is gaining a name for itself in the field of medicine, earning a nickname as the "LinkedIn (a Microsoft subsidiary) for doctors." However, this is a slight misnomer because Doximity does so much more for its users than just assisting in career growth social networking. It also enables doctor-to-doctor communication and patient-to-doctor communication, as well as telehealth services. Doximity also has a research page where medical professionals can learn about the newest, most innovative medical discoveries and practices. Doximity could be better described as a super-app for healthcare professionals, which might be why over 80% of doctors and 90% of medical students use Doximity, according to the company.
Because Doximity has a research segment of its app specifically for doctors to go to discover new drugs and practices related to their practice, drugs makers and healthcare companies find advertising on Doximity to be potentially incredibly valuable. The company has over 600 pharmaceutical manufacturers advertising on its platform, and roughly one-third are each spending over $100,000 a year on ads.
With existing customers spending 73% more today than they did in the year-ago quarter, the company's top line is expanding rapidly. In fiscal 2022's second quarter (ending Sept. 30), revenue grew 76% year over year, demonstrating the company's strong ability to continuously grow despite its dominance. More importantly, Doximity's net income margin is 45%, meaning the company isn't having to invest heavily in marketing and growth to generate its revenue.
According to management, Doximity has over 1.8 million healthcare professionals on its platform -- professionals that dictate 73% of the United States' $4 trillion in annual healthcare spending. Doctors have a lot of influence on where consumers spend healthcare money, which is why advertisers find it so valuable to advertise on Doximity. Doctors want to remain connected with each other, so there would be little interest in other competitor sites if their peers are already on Doximity, giving the company a major network effect. This sustainable edge, combined with the major market the company operates in, could be a recipe for a stock that crushes the market over the next decade.
2. DigitalOcean: The cloud service for SMBs
When it comes to cloud solutions for small- and medium-sized businesses (SMBs), the offered services don't have to be complex. More often than not, SMBs only need a few critical services for their cloud platform, and the expert tools that companies like Amazon's AWS provide are typically feature-laden, unnecessary, and perhaps too complicated. Based on how they operate, it would seem to some that major cloud providers like AWS or Microsoft's Azure haven't noticed this issue. This is why DigitalOcean has been doing so well as a business.
DigitalOcean noticed that SMBs weren't fully getting what they want in a cloud provider, so they began offering a core platform with simple tools like managed databases or app development tools. DigitalOcean also created a community of expert developers ready to answer questions that SMBs have about the cloud or any specific systems. Many SMBs need assistance in the cloud because they do not have expert developers in-house, so they find this community incredibly valuable. As a result, DigitalOcean has attracted nearly 600,000 SMBs from across the world.
The company has stellar financials. It's break-even in terms of profitability, and it generated almost $30 million in free cash flow for the first nine months of 2021. This is impressive considering that the company is still growing rapidly. Revenue grew 37% year over year in the third quarter while average revenue per customer jumped 28% year over year. This balance of growth and near-profitability demonstrates DigitalOcean's capital allocation skills, which should benefit the company over the next decade.
The company has used its competitive advantages in this niche to bring in $455 million in annual recurring revenue, but this is just the start of its future opportunity. Management expects the market opportunity for DigitalOcean to expand at a compound annual growth rate of 27% to $116 billion by 2024, showing just how large this SMB niche is. It's a leader in this space and its products have a great head start over any competition as well as support from the developer community. Combined, all this suggests that DigitalOcean has the best chance of capitalizing on this growth going into the future, and investors stand to benefit along with it over the next decade.
Investor takeaway
Shares of both DigitalOcean and Doximity have been on a rollercoaster ride since their respective IPOs in March and June. Doximity's stock price at one point rose over 100%, but is currently down about 52% from those highs. DigitalOcean stock has seen similar performance: Currently, it is up 63% since the IPO, but it is 42% off its all-time high.
Both stocks have likely fallen due to a mix of IPO hype decreasing and the broader sell-off of tech stocks. Recent IPOs are known for having increased volatility compared to other stocks, and both stocks are (and will be) no exception. You should be prepared for that if you plan to invest. However, the businesses and their competitive advantages could make the volatility worth your while.
