There's no sugarcoating that the past 14 months have challenged investors' convictions in a way we haven't seen in more than a decade. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all plunged into respective bear markets last year and produced their worst returns since 2008.
But among this turmoil lies opportunity for patient investors. Even though we'll never be able to pinpoint when a bear market will begin, how long it'll last, or how steep the decline will be, history does conclusively show that every significant decline has eventually given way to a bull market rally that took the broader market to new highs. It effectively means that every pullback is a buying opportunity for long-term investors.
Image source: Getty Images.
But you don't have to settle for simply matching the S&P 500's or Nasdaq Composite's gains over the long run. By investing in industry-disrupting businesses, you can outpace these benchmark indexes and build yourself a fortune.
What follows are three magnificent growth stocks you can buy right now that have the tools and intangibles necessary to make you a fortune by 2040.
PayPal Holdings
The first phenomenal growth stock with all the necessary catalysts to help build your wealth over the next 17 years is fintech company PayPal Holdings (PYPL 1.32%). Despite being held down by historically high inflation in the short run -- higher inflation reduces the discretionary spending power of low earners -- PayPal's digital payment networks (PayPal and Venmo) are still in the early innings of their growth.
Though estimates vary, Adroit Market Research estimates the global fintech market can grow by an annualized rate of 20.5% this decade. PayPal is currently on the leading edge of this growth wave and ended 2022 with 435 million active accounts, 35 million of which were merchant accounts.
NASDAQ: PYPL
Key Data Points
Even in a challenging economic environment, many of PayPal's key performance indicators remain impressive. Last year, total payment volume (TPV) traversing its networks grew by 14%, excluding currency movements, to $1.36 trillion. In an expanding economy, annual TPV expansion of at least 20% has been the norm.
Arguably, even more important is the steady increase in active account engagement on its digital payment platforms. The 51.4 payment transactions per active account (TPA) over the trailing 12 months (TTM) in 2022 is 28% higher than its TPA at the end of 2020 (40.1 on a TTM basis). Since most of PayPal's revenue originates from fees, rapidly increasing engagement from active accounts leads to sustained double-digit gross profit growth.
This is a good time to mention that PayPal is generating mountains of cash flow, which it's able to use for innovation, acquisitions, and its capital-return program. For instance, PayPal acquired Japan's buy now, pay later company Paidy for $2.7 billion in 2021 to help merchants provide additional payment pathways for their customers. But with the U.S. and global economies now on shakier ground, PayPal repurchased $4.2 billion worth of its common stock in 2022 and plans to reduce its annual expenditures by at least $1.3 billion in 2023.
The best thing about PayPal still being in the relatively early innings of its growth story is that it's valued at a mere 15 times Wall Street's forecast earnings in 2023. This is as cheap as this dominant fintech stock has ever been.
NASDAQ: LOVE
Key Data Points
Lovesac
A second magnificent growth stock that's turning a stodgy industry on its head and is completely capable of making investors a fortune by the turn of the following decade is furniture stock Lovesac (LOVE 2.78%). Even if the U.S. economy were to fall into a recession in the short term -- as three recession-probability indicators suggest will happen -- Lovesac has the innovation, distribution, and consumer niche to thrive.
To be blunt, most furniture retailers are borderline boring. They're slow-growing businesses that rely heavily on foot traffic into brick-and-mortar stores, and most buy their products from the same small group of wholesalers. Lovesac is changing this entire model, and it begins with the company's furniture.
In its early days, Lovesac was well known for its beanbag-styled chairs known as sacs. Today, approximately 90% of its net sales come from sactionals -- modular couches that buyers can rearrange dozens of ways to fit most living spaces. Aside from superior function, sactionals have more than 200 different covers for buyers to choose from, and these covers are made entirely from recycled plastic water bottles. It's furniture with functionality, optionality, and eco-friendliness all rolled in.
Although Lovesac does have retail stores in 40 states, the company's nimble omnichannel sales platform has been critical to its success. The ability to pivot sales online, rely on brand-name partnerships, and operate pop-up showrooms has helped lower overhead expenses and made Lovesac less reliant on foot traffic into its stores. The end result is a push to profitability two years ahead of Wall Street's original expectation.
Another reason Lovesac can continue to excel is its focus on middle- and upper-income consumers. With the ability to add surround-sound systems and wireless charging stations, among other options, sactionals are pricier than your typical sectional couch. However, Lovesac's average (i.e., higher-earning) customer is less affected by inflation and minor economic hiccups than the typical consumer.
Considering Lovesac can support a sustained double-digit growth rate, its forward-year price-to-earnings ratio of 11 is jaw-dropping cheap.
Image source: Getty Images.
PubMatic
The third magnificent growth stock that can make you a fortune by 2040 is small-cap adtech company PubMatic (PUBM +0.45%). Despite the winds of recession creating a weak ad environment in the U.S. at the moment, PubMatic finds itself perfectly positioned in the fastest-growing niche of the advertising industry.
Before getting into company specifics, I'd be remiss if I didn't point out how the ad industry is nothing more than a simple numbers game that benefits the patient. Ad weakness during recessions may be inevitable, but recessions aren't long-lived. By comparison, economic expansions almost always go on for years. During these expansions, ad-driven businesses tend to thrive, and their pricing power improves. Being a long-term investor in most ad-driven companies tends to pay off handsomely.
PubMatic is a programmatic ad company in the sell-side space. In English, this means it helps publishing companies sell their digital display spaces, with its cloud-based infrastructure automatically pairing advertisers with available displays. As I've previously pointed out, there's been a lot of consolidation among sell-side platforms. With few brand-name companies remaining, it's easy for PubMatic to stand out.
NASDAQ: PUBM
Key Data Points
PubMatic is specifically focused on digital advertising. Think mobile, video, connected TV (CTV), and over-the-top programmatic ads. Whereas the digital ad industry is expected to grow at an annualized 15% through mid-decade, PubMatic had been organically growing by 25% to 50% on a year-over-year basis prior to the recent industrywide slowdown. PubMatic generates a lot of its revenue from CTV, which is the fastest-growing segment within the digital ad arena.
Another reason you can expect PubMatic to excel is its management team's decision to build out its cloud-based infrastructure. While relying on a third-party platform would have been easier, the decision to build its own cloud infrastructure means PubMatic will keep more of its revenue as it scales. Translation: PubMatic's operating margins should come in higher than many of its peers.
The company's management team is also fiscally prudent. PubMatic ended September with $166.1 million in cash, cash equivalents, and marketable securities, with no debt. Backing out this cash has investors paying around $655 million for a recurringly profitable company that generated more than $1 in earnings per share in 2021.
