Growth investors can often earn outsized returns in disruptive companies that either transform an industry or create an entirely new one. The rise of Netflix illustrates this point well as it ended the video rental industry and continues to bring about the decline of cable TV.
While today's investors may have missed out on Netflix, emerging stocks continue to disrupt other industries. Three that could benefit current investors now are Palantir (PLTR 3.73%), Nu (NU 1.66%), and Block (SQ 2.32%). Let's dive in and see why.
Palantir
Palantir's analysis tools have become game-changing for many entities. The company's products leverage big-data capabilities and artificial intelligence (AI) to offer analytical insights unmatched by competitors.
Such technology has offered analytical benefits to organizations involved in activities such as national security or business activity. These clients have credited Palantir with accomplishments ranging from helping to find Osama bin Laden to improving supply chain management and production optimization.
AI and machine learning have long served as differentiators in Palantir's processes. However, it took AI to the next level by offering its Azure information protection (AIP) tool, which added generative AI capabilities to Palantir's analysis processes.
In the second quarter of 2023, the company's customer count grew 38% versus year-ago levels. Moreover, since it released AIP during that quarter, that growth likely occurred mainly without AIP.
Furthermore, Palantir has turned a profit in the previous three quarters, and the company expects net-income growth to continue.
Between this profitability and optimism about AIP, Palantir stock has risen over 140% since the beginning of the year. And even though investors may not see its 67 forward price-to-earnings P/E ratio as "cheap," the company's potential to create value and apply AI could continue to draw more investors into the stock.
Nu
Nu is the parent of NuBank, one of the world's largest digital financial-services platforms. It operates primarily in its home country of Brazil, with more recent expansions into Mexico and Colombia.
But to understand the disruptive potential of Nu, one has to understand Latin American finance. In this region, a small number of banks dominated the finance sector, and that situation left millions without access to debit or credit cards.
Nu changed that by seeking to bring these customers into the financial system. Over a one-year period, nearly 6 million Brazilians received their first credit card because of Nu.
So successful is its approach that it has attracted 84 million customers, 28% more than last year. Brazil accounts for 79 million of those customers, around 49% of its adult population. The need to maintain such growth rates may have been the reason to expand into Mexico and Colombia.
Still, its expansion has helped the company turn profitable, with the $367 million in net income for the first half of the year growing from a $75 million loss during the same period in 2022.
Consequently, Nu stock has nearly doubled this year, though it is on the mend from a poorly timed initial public offering (IPO) in late 2021. Nonetheless, with the potential for massive growth in Mexico and Colombia and a forward P/E of 37, investors can buy this compelling investment at a relatively low price.
Block
Investors in the developed-world fintech space should look at Block. Its Square segment is a broad-based fintech ecosystem and is also one of the few fintech companies holding a bank charter. This means it can also provide checking accounts, savings accounts, and loans without involving a third party. This gives Square a competitive advantage over other fintechs.
On the consumer side, the company offers its digital wallet Cash App, one of the largest of its kind in the U.S. This allows users to pay and accept money on a platform that also enables investing and purchasing of Bitcoin.
Because the buying and selling of Bitcoin affects its revenue, most analysts measure the company's top-line growth by gross profit. In the first half of the year, that came in at $3.6 billion, a 30% yearly increase. Although Block does not earn a profit, its operating losses have been shrinking -- landing at $139 million in the first half of 2023, down from a net loss of $412 million during the same period last year.
Admittedly, economic uncertainty has weighed on the stock, and it lost one-third of its value this year. But its price-to-sales ratio of 1.2 is a record low, and assuming the gross profits continue to grow rapidly, Block could see a massive recovery.
