As we round into the new year, a lot of investors are looking for new stocks to bolster their portfolios. If you're tired of looking at the same old large and mega-cap technology stocks, it may pay to go down the rabbit hole and look at some mid- and small-cap companies. These stocks tend to be riskier than more established businesses like Amazon or Apple, but can provide opportunities for life-changing returns if you buy strong hypergrowth stocks at the right prices.
Here are two hypergrowth stocks to buy in 2022 and beyond.
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Latch
Latch (LTCH) is a recent entrant to the stock market that went public through a special purpose acquisition company (SPAC) deal in June of 2021. The company offers smart lock and software solutions to residential real estate companies, mainly big apartment buildings. Its service has both a hardware and software component, but it makes the majority of its gross profit on its software business.
Latch's hardware products are the smart locks that go on every apartment unit, outside door, and shared space in a building. These devices are connected to the internet and are Bluetooth-enabled, allowing residents to unlock doors by holding up their smartphones to the device.
Latch's software services are the mobile apps for residents and a software-as-a-service (SaaS) application for building managers and owners. Latch charges around $7-$12 per month per smart lock for building owners. Why are they able to charge so much for what seems like a simple service? Because the service provides a tremendous amount of value, both through securing the building and saving time and money for residents and building managers.
In Q3, its latest quarterly results, Latch reported revenue growth of 120% year-over-year to $11.2 million. The majority of this revenue is from hardware, with only $2.2 million in software revenue in the period, but investors should look at hardware revenue as a precursor for future software revenue growth, so the current mix is not necessarily a bad thing. Latch also has a clear line of sight into its future revenue, since it signs deals with property developers two to three years before buildings actually become operational and revenue-generating for Latch. The company accounts for this with its bookings metric. In Q3, Latch had total bookings of $96 million, up a whopping 181% year-over-year.
With a market cap of only $1 billion, if Latch can keep up this hypergrowth of both bookings and revenue, shareholders will likely do quite well in the coming years.
Vimeo
Vimeo (VMEO -0.71%) is not growing as quickly as Latch (few companies are), but it is still putting up strong double-digit sales growth and trades at a more reasonable valuation. The company, which was recently spun off of InterActiveCorp (IAC -2.18%), is a video software solution that offers tools for individual creators, small businesses, and even large enterprises like Amazon and Spotify (which are current customers). Products include live streaming across social platforms, screen recording, an easy-to-use video library, hosting virtual events, and monetizing your work through a subscription paywall.
Vimeo makes money by selling subscriptions and enterprise agreements for access to its products, making it a traditional SaaS business. The company gives out monthly metrics for its business; the most recent update reflected November of last year. In the month, Vimeo grew its revenue by 26% year-over-year, driven by subscriber growth of 11% and average revenue per user (ARPU) growth of 12%. This may not seem like "hypergrowth," but Vimeo has a difficult comparison when looking back a year ago when revenue grew 54% year-over-year during the heart of the pandemic. Once these tough comparisons go away in the spring of 2022, we should see Vimeo get back to 30%+ revenue growth, which is management's long-term goal.
Along with this sold growth, Vimeo has high gross margins, hitting 75% last quarter, and is cash-flow positive. Curiously, the stock is down 70% since its spin-off from IAC, giving it a market cap of $2.76 billion and a trailing price-to-sales ratio (P/S) of 7.4. This is relatively cheap when you consider Vimeo's gross margin profile and history of strong revenue growth. If you believe in management's long-term goal of 30%+ annual revenue growth, anyone who buys Vimeo stock now could be well rewarded over the next year and beyond.
You should be aware that an investment in either Latch or Vimeo comes with risk. Both have relatively unproven business models and short histories of profitability and cash generation. However, with reasonable valuations relative to their growth profiles, both Latch and Vimeo have the potential to be strong winners in the coming years, making them great candidates to add to your portfolio as we begin 2022.
