Over multiple decades, Wall Street is a bona fide wealth creator. Looking back more than a century, there hasn't been a single rolling 20-year period where the benchmark S&P 500 hasn't generated a positive total return, including dividends paid, for investors.
But over shorter periods, Wall Street is far less predictable. Since this decade began, the major stock indexes have all endured two bear markets.
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While red arrows can, at times, be tough to stomach, they're actually blessings in disguise for long-term investors. Sizable dips allow opportunistic investors to buy or add to their stakes in high-quality companies at a perceived discount. With all three major stock indexes well below their all-time highs set between November 2021 and January 2022, bargains can still be found.
Patient investors wanting to lean on time as an ally can buy the following three unrivaled stocks now, with the goal of generating life-changing money by 2040.
PayPal Holdings
The first unsurpassed stock that can help investors generate life-altering returns over the next 17 years is none other than fintech leader PayPal Holdings (PYPL 2.90%).
PayPal's shares have completely roundtripped over the past six years. At the moment, skeptics appear to be concerned about margin compression as new entrants enter the digital payments space, as well as historically high inflation, which threatens to reduce the discretionary buying power of low-earning consumers. Consumer purchasing habits are also cyclical, and there remains a reasonable likelihood that the U.S. economy could slow, or shift into reverse, in the coming quarters.
Although all of three of these concerns are tangible and shouldn't be swept under the rug, none of them is going to alter PayPal's long-term growth strategy or profit trajectory.
For starters, PayPal has macro factors working in its favor. Putting aside the fact that the U.S. and global economy will almost certainly have grown by 2040, which will increase consumer/business purchasing activity, digital payments are still in their infancy. Boston Consulting Group anticipates global fintech revenue will soar fivefold between now and 2030 to $1.5 trillion. PayPal is leading that charge.
Despite its recent challenges, total payment volume (TPV) on PayPal's networks (PayPal also owns Venmo) grew 11% on a currency-neutral basis in the June-ended quarter. Think about it this way: If TPV can sustain a low-teens growth rate in an uncertain economy, PayPal should be able to get back to TPV growth of near 20% during long-winded periods of economic expansion.
However, the real key to PayPal's success has been its engagement. When 2020 came to a close, the average active account had completed 40.9 payments over the trailing-12-month (TTM) period. As of June 2023, this figure has expanded to 54.7 payments over the TTM for the average active account. PayPal's operating model is primarily driven by fees, which means increasing engagement from active users is driving its gross profit ever higher.
Over the next year or two, investors can also expect an increased focused on operating efficiency and shareholder returns. PayPal is aiming to reduce its operating expenses by at least $1.3 billion this year, and its board approved an up to $15 billion share repurchase program last year. Reducing the company's outstanding share count should lift earnings per share and make a historically inexpensive industry leader look even more appealing to fundamentally focused investors.
Lovesac
A second unrivaled stock with all the potential in the world to generate life-altering money for its patient investors by 2040 is furniture company Lovesac (LOVE -0.05%).
Lovesac has to overcome two obstacles. The first is that the furniture industry is traditionally viewed as boring, slow-growing, highly cyclical, and heavily reliant on foot traffic into brick-and-mortar stores. With a number of indicators and predictive tools suggesting that an economic slowdown is likely, most investors have ignored furniture stocks.
The other issue is that a recent internal audit discovered errors with the way last-mile shipping/freight expenses were recorded. While this doesn't impact Lovesac's cash balance or alter its growth trajectory, it will lead to a modest earnings restatement for the prior fiscal year. The key point here is that Lovesac is owning up to its accounting mistake and moving beyond this one-time snafu.
What makes Lovesac such a special company is that it's completely changing the perspective that furniture companies are slowing-growing or bound to physical locations.
Though Lovesac was originally known for its beanbag-styled chairs called "sacs," nearly 90% of its net sales today come from modular couches known as "sactionals." Sactionals can be rearranged dozens of ways to fit most living spaces, and there more than 200 different cover choices for buyers, which ensures it'll match the color or theme of a room. Best of all, the yarn used in sactionals is made entirely from recycled water bottles. This combination of functionality, optionality, and eco-friendly furniture is unmatched.
Lovesac also isn't shy about the customer it's trying to court. Given the array of upgrade options available with sactionals (e.g., surround sound and wireless charging ports), they're pricier than traditional sofas and sectional couches. Thankfully, Lovesac tends to attract high-earning consumers who are often less affected by inflation and minor economic downturns. In theory, Lovesac should be able to navigate recessions better than its peers.
But the linchpin to Lovesac's success just might be its omnichannel sales platform. Although it does have a physical presence in 40 U.S. states, the company has pivoted to online sales, popup showrooms, and brand-name partnerships (e.g., Costco Wholesale and Best Buy) as a way to bolster sales and brand awareness. Having less of a physical footprint lowers Lovesac's overhead expenses and lifts its margins well above its peers.
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Etsy
A third unrivaled stock that can generate life-changing money for investors by 2040 is online marketplace Etsy (ETSY 0.34%).
To keep with the theme, Etsy has also been weighed down by the expectation that the U.S. economy will fall into a recession, or at the very least weaken in the coming quarters. History shows that consumer spending declines when economic uncertainty picks up.
Furthermore, Etsy's sales growth has noticeably slowed from the height of the COVID-19 pandemic. Going against some difficult year-over-year and two-year comparisons has clearly turned some investors off of Etsy. But their loss can be your gain.
Superficially, there seems to be a lot of competition for consumer dollars from online marketplaces. However, Etsy's merchant base is what makes it unique. Whereas most e-commerce companies are purely focused on volume and an impersonal user experience, Etsy's merchant base is made up of small businesses and self-proprietors who can personalize and customize products in a way that even giants like Amazon can't match. Even as new e-commerce players enter the space, none holds the personalization at scale that Etsy can offer.
Investors should also note that while Etsy's growth rate has temporarily slowed on a year-over-year basis, it's key performance indicators have made sizable gains since prior to the COVID-19 pandemic. Case in point: the number of habitual buyers has grown by 218% from June 2019. A "habitual buyer" makes at least six purchases over the TTM period, with the aggregate of those buys totaling at least $200. These folks represent 43% of the gross merchandise sales (GMS) on Etsy's platform and are the heart and soul its growth.
Additionally, Etsy's take-rate have been steadily inching higher. This "take-rate" describes what Etsy keeps in revenue as a percentage of GMS on its platform. The June-ended quarter saw the company's take-rate expand to 20.9%, which demonstrates the fee-based power Etsy has over its growing merchant base.
Even macroeconomic factors are going to work in Etsy's favor over the long run. Since economic expansions last considerably longer than recessions, consumer buying activity on Etsy's platform should meaningfully increase over time.
The company's aggressive reinvestments into its platform and to aid its merchant base suggest its growth story is just getting started.
