Businesses that grow their revenue and profits briskly for long periods of time can deliver outstanding returns to their investors. If you can identify these companies early in their expansion cycles, you could earn wealth-changing gains in the stock market.
Read on to learn more about two stocks with tremendous growth prospects. Both currently have market capitalizations of less than $2 billion, placing them squarely in small-cap territory. Better still, they both have the potential to expand exponentially in the years ahead.
1. Hims & Hers Health
Explosive customer growth, rapidly improving profitability, and a huge market opportunity combine to form a powerful formula for market-beating returns. Hims & Hers Health (HIMS 1.87%) offers investors all this and more.
The direct-to-consumer healthcare company is building a trusted brand in a marketplace where trust is vital. Hims & Hers operates a telehealth platform that offers digital consultations with doctors. It specializes in sexual health, hair loss, and other conditions that people may find uncomfortable to speak about in person. Hims & Hers offers a discreet and convenient online experience for its customers to find the treatment options they need.
The results speak for themselves. Hims & Hers' subscriber count surged 87% year over year to $1.2 million in the first quarter. Its revenue, in turn, soared 88% to $191 million.
It should be noted that Hims & Hers is not yet profitable based on generally accepted accounting principles (GAAP). But its profit margins are improving quickly as it scales its revenue base. The company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) checked in at $6 million in Q1, up from a loss of $6 million in the prior-year period.
The repeat-purchase nature of its business, strong customer retention, and a steadily expanding product lineup should fuel further increases in Hims & Hers' revenue and earnings. There's plenty of room for continued expansion. Despite years of torrid growth, Hims & Hers' customers account for only a small fraction of the people in the U.S. who have the conditions it caters to, and much less in international markets. Suffice it to say, this hard-charging growth stock is just getting started.
2. Redfin
High mortgage rates are the bane of the real estate industry. They can lead to a decline in home prices, which can make homeowners reluctant to sell. Higher interest costs also make buying a house less affordable, which can reduce the number of eligible buyers. None of this is good for real estate services companies like Redfin (RDFN 8.49%).
Yet Redfin has used the downturn to reshape its business. It shuttered its money-losing home flipping division, slashed costs, and refocused on its core brokerage operations. The company that emerged is leaner, more profitable, and better positioned for long-term success.
Redfin's tech-focused approach and salaried agents enable its unique value proposition for home sellers. The discount brokerage charges listing fees as low as 1%. That's less than half the typical agent fee of 2.5%. By saving sellers thousands of dollars in home sale costs, Redfin has grown its share of the massive $126 billion U.S. housing market to 0.8%, up from 0.4% in 2017.
Redfin owns the most-visited brokerage website, with nearly five times the traffic of its closest competitor. This helps to funnel large numbers of buyers and sellers to its brokerage business and reduce its customer acquisition costs. Redfin has also begun selling ad space on its sites to further monetize the over 50 million average monthly users on its mobile apps and website. Rental listings and a fast-growing mortgage marketplace provide Redfin with additional growth drivers.
Like Hims & Hers Health, Redfin is not yet profitable. But its losses are shrinking, and management expects to generate positive adjusted earnings in 2023 and net income by 2024. Redfin's drastic cost cuts and continued market share gains should help it achieve its profitability goals. Investors who buy shares today stand to be well rewarded, especially once the housing recovery gains steam.
