One of the best ways to earn millionaire-making returns is to identify future industry leaders while they're still small. The telltale sign of a future winner is growth and lots of it.
Let's take a look at two relatively small companies that are reporting high revenue growth. These companies' share prices trade at low valuations, potentially setting the stage for above-average returns over the long term.
1. Toast
Toast (TOST 3.42%) is a cloud-based technology platform for restaurants. It helps restaurant owners run their businesses more smoothly with fewer headaches from dealing with outdated legacy software systems. The company's incredible growth suggests it is tackling a massive opportunity that could make the stock a dream investment for retirement savers.
The company's revenue has more than doubled over the last two years, but the stock hasn't kept up with the company's progress. Wall Street continues to worry about near-term issues that don't really matter in the grand scheme of things.
For example, some investors are concerned about Toast's weakening transaction volume growth toward the end of the third quarter. However, Toast still reported revenue growth of 37% year over year as it continued adding new restaurant locations at a healthy clip.
Another reason these concerns are overblown is the stock's bargain valuation. The shares currently trade at a price-to-sales ratio of about 2.25, which is cheap for a fast-growing software company. The market is undervaluing the enormous advantage Toast has in winning over new customers. It added 6,500 new locations in Q3 as word continued to spread about the convenience of using Toast's timesaving software tools.
Toast is still a small business in a huge market. With only $1.2 billion in annualized recurring revenue, Toast can grow at high rates for a long time. There are 22 million restaurants globally, according to Euromonitor, and more restaurants are ramping up their spending on technology. Toast has a great opportunity to emerge as the top brand in the restaurant software market.
If you're looking for a growth stock that can compound in value for potentially decades, Toast is a prime candidate. The company is proving its value, but the stock is dirt cheap. Buying future industry leaders before Wall Street catches on is a recipe for wealth-building returns.
2. StoneCo
StoneCo (STNE 5.01%) is a leading fintech company based in Brazil that offers payment services, digital banking, and credit solutions to small businesses.
Brazil's digital payments market is booming and has fueled explosive growth for StoneCo in recent years. Revenue has more than doubled over the last two years, and it should continue to grow for years.
The total transaction value of digital payments in Brazil is expected to reach $108 billion this year, up from $37 billion in 2017. Stone is well positioned to capture this opportunity. Stone's strategy is centered around relationships with small businesses and expanding its range of financial services. It's building a durable competitive advantage, which explains why Warren Buffett's Berkshire Hathaway held $114 million worth of shares at the end of the third quarter.
Stone's 2021 acquisition of Linx stretched its opportunity into the retail software market, where the company is looking to integrate its financial products. This new market should continue to fuel its momentum.
Most importantly, Stone is growing profits through increasing margins. Adjusted net income increased by 35% last quarter, and management sees more opportunities to leverage operating costs and grow profits faster than revenue over the long term.
A big catalyst for the stock is management's guidance for 31% annual growth in adjusted net income through 2027. Investors can ride its future growth on the cheap, with the shares trading at a modest forward price-to-earnings ratio of just 18.5. Investors have an opportunity to buy a leading digital payments provider in one of the fastest-growing e-commerce markets at bargain prices.
