When it comes to building a successful investment portfolio, identifying stocks with long-term potential is key. Investors who seek out companies on the frontier of groundbreaking industries often find themselves at the forefront of profitable trends. It is equally important for these companies to demonstrate robust financial health, possess distinct competitive advantages, and prioritize continuous innovation.
In this article, we will explore two companies that fit these criteria, positioning themselves as potential all-stars in the making: Coinbase (COIN -7.68%) and Tesla (TSLA 15.31%). Both have shown resilience and agility in navigating their respective industries, making them promising contenders for investors seeking high-growth opportunities.
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Crypto's clear-cut leader
Since its highly anticipated debut on the Nasdaq, Coinbase has faced a challenging journey. The initial excitement surrounding its IPO quickly faded as a severe bear market engulfed the crypto asset class. As a result, Coinbase's top line plunged by more than 75% at the end of 2022 as its primary source of revenue -- transaction fees -- dried up due to declining investor interest in cryptocurrencies. However, in response to those challenges, Coinbase has undergone significant transformations and proved resilient in overcoming hurdles.
In an effort to diversify its revenue stream, Coinbase expanded its "subscriptions and services" segment, which now contributes half of its revenue. This segment includes custodial services, staking, and interest-earning products. By reducing its reliance on transaction fees, which at one point provided nearly 95% of its net revenue, Coinbase has transformed its business model to adapt to market conditions and create new growth opportunities.
Adding to new sources of revenue, Coinbase recently launched its "Go Broad, Go Deep" global expansion strategy. Recognizing the opportunity to grow its international presence, Coinbase has brought its flagship subscription service, Coinbase One, to 34 countries. In addition, it released the Coinbase International Exchange, a platform that allows institutional investors to trade perpetual futures contracts. This type of leveraged trading is extremely popular and makes up as much as 75% of global cryptocurrency activity.
Moreover, the company has significantly reduced expenses and optimized its operations. Today, it is on the verge of turning a profit -- the closest it has been to doing that since Q4 2021 when it brought in $840 million in net income. Coinbase's net loss totaled $79 million in the first quarter, down from $430 million in the prior-year period, and favorable tailwinds seem to be forming. A potential victory in its battle with the Securities and Exchange Commission (SEC), a rebounding crypto market, and growing interest from Wall Street firms could position Coinbase to return to prominence. With its stock price still down more than 73% from its peak, this could be a golden opportunity for long-term bargain hunters.
Driving the autonomous future
Tesla continues to stand out from the crowd with its unparalleled track record as the sole profitable electric vehicle (EV) company. Like clockwork, its most recent earnings report once again reaffirmed its position at the top of the industry.
During the second quarter, Tesla produced 479,700 vehicles, a new record for the company and up 85% year over year. Furthermore, the company delivered 466,140 vehicles, another record. Revenues soared 47% to an all-time high of $24.9 billion.
Despite those strong headline numbers, Wall Street expressed concern over Tesla's shrinking profit margins, and the stock is down 12% following the report. The company's gross margin dipped to 18.2%, down from 25.0% in the year-ago quarter and 19.3% in the first quarter. These declining margins have come as the company cut prices on its vehicles in the face of growing EV competition, inflation, and rising interest rates.
But Tesla still enjoys some of the highest margins in the auto industry, and CEO Elon Musk stressed during the latest earnings call, "The short-term fluctuations in gross margin and profitability are insignificant in comparison to the long-term picture," before adding that achievement of autonomous driving "will make all of these numbers look foolish."
Targeted for completion by the end of the year, the unveiling of fully autonomous driving means Tesla's true potential might just be in its infancy. With EVs offering full self-driving capabilities, Musk's vision for a Tesla robotaxi service would attract "quasi-infinite demand," and that opportunity stands as the company's biggest priority.
Zooming out even further, Tesla maintains positive free cash flow despite the inherently cost-intensive nature of EV production, a feat Musk describes as "ridiculous." Tesla's financial strength is one of its most distinct competitive edges, providing the company with the capacity to continue its investments in cutting-edge technologies that have been instrumental to its success. With this powerful combination, Musk believes the company could expand by five to 10 times from its current levels.
