One potentially lucrative investment strategy is to focus on businesses that are challenging the status quo. Developing innovative products and services, with the mentality to constantly question why things are the way they are, can result in massive gains for companies and their shareholders over time.
Along that same vein, here are three disruptors that I love right now. They have the potential to be huge winners in the stock market.
The first disruptor you should know about is Coinbase Global (COIN -3.98%). Most people know about this business as one of the first cryptocurrency exchanges and brokerages. Management's initial focus was to make it as easy as possible to buy and sell Bitcoin. Since then, Coinbase's capabilities have significantly expanded. As of Dec. 31, the company allows for trading in 139 different cryptocurrencies and custody for 172.
Many investors are turned off by the fact that Coinbase generated 93% of its total 2021 net revenue from volatile and unpredictable transaction fees. But management understands that in order to be successful over the long term, it needs to position the business to capitalize on crypto's transition from speculation to actual utility. That's why initiatives like Coinbase Cloud, a platform to help developers build crypto-related applications, and Coinbase NFT, a marketplace to mint and trade non-fungible tokens (NFTs), are a huge focus right now.
In 2021, Coinbase posted $3.6 billion of profit on $7.4 billion of net revenue, producing a net income margin of 48.6%. For a company that is in hypergrowth mode, that kind of profitability is incredible. The stock also trades for an attractive valuation, at just nine times trailing-12-month net income. An investment in Coinbase is a bet on the continued growth of the entire crypto industry.
The next disruptor I like right now is Peloton Interactive (PTON -6.31%). It's without question that this once high-flying stock has seen better days. Management, led by previous CEO and co-founder John Foley, completely misjudged demand as economies reopened, investing in supply chain and manufacturing capacity, only to be hit with a new reality of slower growth coming out of the pandemic.
But with new CEO Barry McCarthy at the helm, and pessimism surrounding the stock through the roof, I think a brighter future is ahead. This business created the connected fitness category, and its products -- like the Bike, Bike+, and Tread, and its digital-only app -- are incredibly popular with workout junkies, as there were 3.6 million total subscribers as of Dec. 31. Emphasizing the Peloton brand and user experience will be key going forward.
Not only has the company developed a game-changing exercise platform, as well as innovative fitness equipment, but McCarthy is starting to think outside the box when it comes to Peloton's pricing strategy. In order to get more bikes and treadmills into as many households as possible, management is testing out a single monthly price for consumers in select markets in an effort to reduce customer friction. Trying to generate more revenue over time from subscription fees, which carry a gross margin of 67.9%, is the right move.
Upstart Holdings (UPST -5.10%) might just be the most disruptive company on this list. The fintech business, led by CEO and co-founder Dave Girouard, has developed a platform that leverages artificial intelligence to inform lending decisions. By partnering with other banks, Upstart doesn't directly take on credit risk. Using thousands of data points about a borrower, the company's goal is to increase accessibility of credit to those who might otherwise not be approved for loans through traditional channels. This system has the potential to completely upend the old FICO model.
The business is young, having been founded in 2012 and entering the public market in December 2020. Unsurprisingly, growth has been superb. Total loan volume and revenue surged 338% and 264%, respectively, in 2021 compared with the prior year. And Upstart is profitable, producing net income of $135 million last year.
While Upstart has so far primarily only offered personal loans, the business is slowly making inroads into the $727 billion domestic auto-lending market, having signed up 10 bank partners and 410 different dealership locations. Looking ahead, management wants to penetrate the gargantuan mortgage market, which is estimated to be $4.6 trillion in the U.S.
With shares down almost 50% this year, investors have the opportunity to buy Upstart on the dip.