It's a new year, and investors are looking at today's hot investment themes: New industries that offer rapid growth and compelling returns for the investors who pick the next big winner. But there are so many companies to choose from in hot spaces like fintech, the metaverse, and e-commerce. How do you know which ones will succeed?
Complicating matters is the trend that saw growth stocks selling off during much of 2021. While this has caused some angst among investors holding stock in these companies, its also created situations where there are some high-quality stocks now available at attractive prices. the trick is to avoid the weak players in these hot spaces and focus on the best-in-class.
It's time to separate the contenders from the pretenders.
Buy: Meta Platforms
The metaverse, where the internet and the physical world come together, is potentially a massive opportunity for the next decade and beyond. Some estimates put the value of the metaverse at trillions of dollars. Social media conglomerate Meta Platforms (META 0.85%) has changed its name from Facebook to symbolize its lean into this new frontier.
The company's social networks combine for a staggering 2.9 billion monthly active users. CEO Mark Zuckerberg has made it clear that Meta will be investing billions of dollars over the coming years to develop its metaverse business. Analysts see Meta growing its earnings per share by 20% per year on average over the next three to five years. It generates $9 billion in free cash flow each quarter, giving it lots of financial ammo to become a key cog in the digital frontier.
Don't buy: Matterport
Spatial data company Matterport (MTTR -1.10%) has technology that lets customers convert real spaces like buildings, structures, and rooms into digital copies that can be measured and interacted with. This could have many uses in the metaverse, like creating digital storefronts or spaces that mimic real-world places.
However, Matterport is young and unproven versus a company like Meta, despite the possibilities. It grew total revenue by just 10% year over year in third-quarter 2021, its most recent quarter. Meanwhile, Matterport is losing money, posting operating losses of $14 million for the quarter, even after pulling out share-based compensation (reported losses were approximately $44 million).
Buy: Upstart Holdings
Technology is changing the financial industry, and Upstart Holdings (UPST -4.71%) has introduced new creditworthiness measuring tools to replace a longtime standard, the FICO credit score. The company uses artificial intelligence to determine who should qualify to receive loans; its algorithms approve more borrowers while experiencing 75% fewer defaults.
The company is growing rapidly. Revenue was $228 million in Q3 2021, a 250% year-over-year increase. Upstart's also profitable, generating $29 million in net income despite its high growth. The company currently works with just 31 lenders, a tiny fraction of the more than 10,000 banks and credit unions across the United States. Upstart has a long growth runway with new lending segments emerging.
Don't buy: Robinhood Markets
This stock and cryptocurrency trading platform has been a disappointment since its IPO in July 2021. Robinhood Markets (HOOD 1.28%) stock price has fallen more than 82% from its 52-week high. The company's brand is all about the retail trader, known for its user-friendly interface, commission-free trades, and simplifying more complex topics like options trading. Robinhood's platform has almost 19 million monthly active users.
Unfortunately, Robinhood appears to be a beacon for speculative investors; its filings to go public revealed that 17% of revenue at the time came from cryptocurrency trades, 34% of that from trades in Dogecoin. As markets have declined, so has Robinhood's revenue per user, falling from $137 in the first quarter of 2021 to $65 in Q3 2021, more than 50% in just six months. The potential volatility in the business from Robinhood's appeal to speculative retail investors makes it a more risky stock until the company puts more quarters of results out for investors to digest.
E-commerce is not a new investing theme, especially after Amazon has brought e-commerce into the daily lives of millions. However, there are still massive opportunities in niche retail companies like Etsy (ETSY -2.94%), whose marketplace gives creators a platform to sell unique goods like homemade crafts.
Etsy received a massive boost to revenue growth during the pandemic as masks became a popular offering on the marketplace. Revenue grew 18% year over year in Q3 2021, but in the past two years, growth has been 138%. Etsy is also investing in strategic acquisitions, recently buying Depop and Elo7 for a combined $1.8 billion, expanding the breadth of its platform.
Don't buy: Jumia Technologies
International opportunities are attractive; e-commerce is still less developed in emerging markets like Africa, where Jumia Technologies (JMIA -0.97%) operates. Africa is a massive market with 1.3 billion people, and Jumia's e-commerce, logistics, and payment offerings could help this developing demographic enter the digital world.
It's hard to argue against the long-term potential of this market, but Jumia's execution and small size make it a risky stock. The company had to reverse some expansion plans after concerns about the business's profitability. Its market cap is just $1 billion, and such a small company may lack the resources to fund the expansion needed for such a large region. Etsy is still growing rapidly but is arguably much more established, giving investors a nice mix of safety and upside.