Most leading brokerage firms offer fractional investing to their clients, which helps them buy less than a full share of a given company if they don't have the means to buy full shares. It's a great tool for small-scale investors who might want to buy into a stock like Chipotle Mexican Grill, which trades at $1,493 per share at the moment -- a relatively large outlay. But some of these smaller investors might still want to own full shares in a company.
While every stock portfolio should include a healthy mix of large, blue-chip companies like Chipotle, Apple, Microsoft, and Amazon, there are some enticing opportunities at the smaller end of the market for investors with a little more risk appetite. Let's explore why GoPro (GPRO -0.27%) and Redfin (RDFN 0.62%) are two of the most intriguing picks. As an added bonus, either stock can be bought with a $10 bill.
1. GoPro has unlocked new revenue streams
The market for action cameras is relatively niche, and the segment doesn't generate much growth as a result, which is exactly the problem GoPro has suffered from for years. Its stock set an all-time high of $93.85 in 2014, but it has steadily declined to trade at $5.21 today. But there are some clear signs its business has stabilized, and the stock has the means to make a recovery.
The company supplements its camera hardware business with a series of subscriptions. Its most lucrative subscription is for the GoPro.com website, where customers can pay $50 per year to unlock exclusive product discounts, cloud storage, and the ability to livestream from their GoPro cameras. At the end of 2022, the company had 2.25 million subscribers, which was up a whopping 43% from the year prior. In 2023, GoPro.com subscriptions are expected to generate $100 million in annual recurring revenue.
Additionally, GoPro has a smaller subscription service for its Quik smartphone camera application, and it's slated to release new desktop video editing software this year, which will add yet another revenue stream. The good news is that subscriptions have a gross profit margin of 70% to 80%, so much of the revenue flows to GoPro's bottom line.
Finally, the company is becoming less reliant on large retailers to sell its cameras. It now makes 40% of its sales through its own website, where it keeps all of the profit rather than splitting it with its retail partners.
On a valuation basis, GoPro stock looks attractive. Based on its 2022 non-GAAP earnings per share of $0.47, it trades at a price-to-earnings (P/E) ratio of just 11. That's less than half the P/E of the Nasdaq-100 index, implying GoPro stock would have to double just to trade in line with the broader tech sector. That presents an attractive opportunity while the company continues to grow its highly profitable subscription businesses.
2. Redfin has right-sized and refocused
The real estate sector hasn't been a fun place to be for investors over the last 12 months. The U.S. Federal Reserve hiked interest rates at the fastest pace in history to quell surging inflation, which topped a 40-year high in June last year. Naturally, demand for houses cooled because the cost to maintain a mortgage skyrocketed, and that directly impacted real estate technology company Redfin.
Redfin stock is currently down 92% from its all-time high and trades around $7.56 a share. The company offers a suite of real estate services, specializing in brokering with more than 2,000 lead agents covering 98% of U.S. geographic markets. That level of scale allows Redfin to charge listing fees of just 1% compared to the industry norm of 2.5%. The substantial savings for sellers drives more listings to Redfin -- the company represented 0.8% of all homes sold in the U.S. in 2022.
While that part of the business remains healthy, Redfin had to close its RedfinNow iBuying (direct buying) segment late last year. It involved Redfin purchasing homes directly from willing sellers and then attempting to flip them for a profit. But when the real estate market slowed, the company was at risk of substantial losses on its inventory of homes. Alongside the closure, Redfin laid off about 13% of its workforce to trim expenses even further.
It's all part of the process to right-size the business for the current real estate environment. Redfin says U.S. homeowners have seen $2.3 trillion wiped off the value of their homes since their peak in June 2022, which is forcing some sellers to wait for a recovery to list their homes, and it also scares buyers away in the event that conditions deteriorate further.
The closure of RedfinNow means Redfin will only generate about $1.1 billion in total revenue during 2023, down from $2.2 billion in 2022. But on the plus side, the company says it paves the way for profitability as soon as this year, which could substantially de-risk Redfin stock for investors.
Given the company has a market capitalization of just $830 million right now, it's trading at a price-to-sales ratio of less than 1 based on 2023 revenue estimates. That's a rock-bottom valuation and presents an intriguing risk-reward opportunity for investors with some risk appetite, especially because inflation has been steadily declining lately.
