If the past three years have taught investors anything, it's that Wall Street can be fickle. Since the decade began, all three major stock indexes have bounced back and forth between bull and bear markets. While this can be frustrating for short-term traders, it's something of an ideal scenario for long-term investors angling to buy stakes in game-changing businesses at a discount.
With the iconic Dow Jones Industrial Average, benchmark S&P 500, and growth-centered Nasdaq Composite, still 8%, 9%, and 15%, respectively, below their record-closing highs, as of Oct. 11, 2023, amazing deals can be found.
What follows are three generational wealth-building stocks that can set you up for life.
Image source: Getty Images.
PayPal Holdings
The first game-changing company that has the potential to generate life-altering wealth for patient investors is fintech stock PayPal Holdings (PYPL 2.90%). While there's been some near-term concern about the company's margins and the growing likelihood of a U.S. recession, neither of these worries alters PayPal's growth strategy or addressable market.
The macro tailwind in PayPal's sails is that digital payment adoption is still in its relative infancy. Earlier this year, a report from Boston Consulting Group forecast a sixfold increase in global fintech revenue by 2030 ($245 billion to $1.5 trillion). Though the fintech landscape is competitive, PayPal is currently leading the charge. If digital adoption continues at a steady pace, the expectation would be for PayPal to sustain a double-digit earnings growth rate through at least 2030.
PayPal's active user engagement trends are also quite promising. When 2020 came to a close, the company's average active customer was completing just shy of 41 transactions on a trailing-12-month (TTM) basis. As of the end of the second quarter of 2023, this same active user is now averaging closer to 55 transactions over the TTM. Most of PayPal's digital platforms are fee-based and usage driven. In other words, increased engagement from active users has many of the company's key performance metrics pointing higher.
Something else to consider is that PayPal has been relatively immune to economic "hiccups." Even with growth challenged at the moment, total payment volume (TPV) spanning its network (primarily PayPal and Venmo) grew 11% in the June-ended quarter, on a currency-neutral basis, from the prior-year period. If PayPal can sustain double-digit TPV growth when things are this uncertain, imagine how quickly it's going to grow during the typical multiyear expansion for the U.S. economy.
Lastly, the valuation makes sense. With management being mindful of expenses and the company's board approving a $15 billion repurchase program last year, a forward-year price-to-earnings (P/E) ratio of 10 is as cheap as PayPal has ever been as a publicly traded company.
Lovesac
A second generational wealth-building company that can set you up for life is furniture stock Lovesac (LOVE -0.05%). Yes, I did just imply that a furniture company can be a game changer for your financial situation.
Furniture companies are traditionally slow-growing and heavily reliant on foot traffic into brick-and-mortar locations. What's more, most furniture companies lean on the same small group of wholesalers, which leads to minimal real product differentiation. Lovesac is taking this traditional view of the furniture landscape and completely turning it on its head.
The first well-defined difference between Lovesac and seemingly everyone else in its industry is its furniture. Though it was initially renowned for its beanbag-styled chairs known as "sacs," almost 90% of its net sales these days originate from sactionals.
A "sactional" is a modular couch that can be rearranged a multitude of ways to fit most living spaces. Sactionals have more than 200 different covers to choose from, they can be upgraded with an assortment of premium features (e.g., wireless charging and surround-sound systems), and the yarn used in their production is made entirely from recycled plastic water bottles. It's a functional, ecofriendly product that has no comparison.
Lovesac's target audience is also an advantage for the company. There's no denying that functionality, optionality, and eco-friendliness comes with a price. Sactionals are certainly pricier than traditional sectional couches. However, the middle- and upper-income consumers that Lovesac targets are less-inclined to alter their buying habits because of high inflation or minor slowdowns in the U.S. economy. In short, it sets Lovesac up to better navigate downturns than its peers.
The company's omnichannel sales platform is the final puzzle piece that sets it apart. Although it does have a brick-and-mortar presence in 40 U.S. states, Lovesac thrived during the pandemic by pivoting to online sales, popup showrooms, and expanding its brand-name showroom partnerships. This strategy is reducing its overhead expenses and lifting its operating margin well above its competition.
Image source: Getty Images.
Fiverr International
The third generational wealth-building stock that can set you up for life is online-services marketplace Fiverr International (FVRR 3.74%). Despite short-term fears of a U.S. recession and what it might do to the labor market, Fiverr's is riding a wave of macro and company-specific competitive edges.
Before digging into company specifics, it's important to note that while recessions are a perfectly normal part of the U.S. economic cycle, only three of the 12 recessions after World War II have lasted at least 12 months, and none have surpassed 18 months. While recessions are short-lived, expansions are almost always measured in multiple years. For a platform like Fiverr that connects freelancers with businesses seeking their services, it means far more time in the proverbial sun than under gray clouds.
Furthermore, the dynamics of the labor market have completely changed in the wake of the COVID-19 pandemic. While some people have returned to the office, more workers than ever have stayed remote. This is music to the ears of gig economy companies like Fiverr, whose online marketplace is poised for growth as it connects these remote workers with businesses.
Fiverr's online-services marketplace provides clear-cut differentiation from its competition, as well. Whereas most of Fiverr's competition allows freelancers to price their services at an hourly rate, freelancers on Fiverr are listing their jobs as at an all-inclusive price. The cost-transparency that Fiverr's platform provides for buyers has been critical in expanding spend per buyer.
But the real jaw-dropper for Fiverr International is the company's take-rate -- i.e., the percentage of each deal negotiated on its platform it gets to keep, including fees. Ideally, companies want the highest take-rate possible without scaring away freelancers or buyers. Whereas the company's core competition has a take-rate in the mid-teens, Fiverr's take-rate hit 30.7% in the June-ended quarter and has continually expanded. Fiverr is generating considerably more revenue from deals negotiated on its platform, yet it's not chasing away the freelancers and buyers that make its business model successful.
Like PayPal, the valuation proposition is a no-brainer. Despite a sustained double-digit growth rate, shares of Fiverr can be purchased for less than 13 times Wall Street's consensus adjusted earnings for 2024. That's an all-around bargain for a game-changing company.
