It’s common knowledge that buying stocks of high-quality companies and holding them for years or even decades is one of the single best ways to generate long-term wealth. What’s also increasingly clear is that, if investors resist the urge to buy and sell frequently, a small number of stocks will ultimately be responsible for a majority of their portfolio gains — particularly over the longer term.
For investors with an appropriate time horizon and the tolerance to include an element of risk in their portfolio, adding a few high-growth stocks into the mix can help boost the overall results.
Assuming you have an adequate emergency fund and $3,000 (or less) in disposable cash you don’t expect to need for at least the next three to five years, here are three high-growth companies that could be monster stocks in the making.
1. PayPal: Best quarter in history
The onset of the pandemic has changed consumer behavior in a number of ways, but one of the most noticeable changes has been the rapid acceleration in the adoption of digital payments. Arguably, no U.S. company is better positioned to benefit from that trend than PayPal (NASDAQ:PYPL).
While transaction volume initially fell as fears regarding COVID-19 roiled the financial markets, PayPal was quick to report a rapid turnaround, noting “unprecedented demand” and saying that “April was probably the strongest month for PayPal since we became a public company.”
Now, PayPal has reported the best quarter in the company’s history, and investors could be in for more of the same. In the second quarter, total payment volume grew 29% year over year to $222 billion, while the number of payment transactions grew by 26% to 3.7 billion.
This huge increase in transactions drove revenue to $5.26 billion, up 22%. The bottom line was equally impressive, with earnings per share (EPS) of $1.29, jumping 86%, while adjusted EPS climbed 49%. Cash flow from operations stole the show, soaring 103% to $2.4 billion.
PayPal added 21.3 million net new active accounts, up 137% year over year, marking the strongest quarterly results in the company’s history. Engagement was solid as well, with the number of payment transactions per active account climbing to 40.7 over the trailing-12-month period.
People won’t stop using digital payments once the pandemic is in the rearview mirror, which bodes well for PayPal’s future.
2. Shopify: Riding the wave of e-commerce
Another change in consumer behavior has been the increasing reliance on digital shopping to stock the shelves. Retailers that failed to adopt e-commerce were scrambling to make the move online in order to survive, and many of them turned to Shopify (NYSE:SHOP), driving the stock to new all-time highs.
The company provides many of the tools necessary to establish and maintain an online retail presence, allowing merchants to build a website, manage inventory, process payments, and arrange shipping. It also helps integrate an e-commerce element into a company’s existing physical retail operations.
Shopify was there to answer the call, but the numbers were truly staggering and investors were taken aback by the sheer magnitude of the shift that’s occurring. Shopify reported second-quarter results that far exceeded even the most robust expectations.
Revenue of $714 million grew 97% year over year, pushing the company’s non-GAAP (adjusted) EPS to $1.05, up more than tenfold compared to the prior-year quarter.
New stores created on the platform grew 71% quarter-over-quarter, while gross merchandise volume (GMV) — or the value of the merchandise sold on its platform — soared 119%. It’s important to note that this stunning growth occurred even as GMV from point-of-sale systems in its brick-and-mortar stores declined by 29% sequentially.
The pandemic is far from over, and Shopify is likely pulling forward business it might not have generated for years. Still, once an e-commerce store is up and running — providing a merchant with an additional revenue stream — there’s simply no going back.
3. Teladoc: The new definition of “house call”
In the era of COVID-19, many people are not going out unless it’s absolutely necessary — and that includes trips to the doctor’s office. As a result, telehealth solutions, which were already experiencing broad adoption, got a booster shot, accelerating adoption even faster. One of the biggest beneficiaries of the trend is Teladoc Health (NYSE:TDOC), the global leader in virtual care.
Even before the pandemic, patients increasingly sought the ease and convenience of meeting with a healthcare professional without ever leaving the comfort of home. In the third and fourth quarters of 2019, year-over-year revenue grew 24% and 27%, respectively. However, with the onset of coronavirus, growth escalated, soaring 41% and 85% in the first two quarters of 2020 — and that could be just the beginning.
The second quarter was a blockbuster across a variety of metrics. Total U.S. paid visits were up 227% year over year, but fee-only visits in the U.S. grew a staggering 468%, pushing Teladoc’s total visits up 203% to more than 2.7 million virtual patient visits.
For full-year 2020, the company is now projecting revenue of $988 million, an increase of more than 40% from its forecast issued just six months ago. That represents 78% year-over-year growth compared to 2019.
Once patients have tried a telehealth appointment, the majority say they will use it in the future. A recent survey reported that half of the 1,800 respondents had used telehealth during the past three months. More importantly, 71% are willing to use it today, and 83% of those surveyed said they plan to use telehealth even after the pandemic dies down.
Are we there yet?
Considering how well these companies have done so far in 2020, some might argue that the train has already left the station and the best gains are already reflected in the current stock price. That view is understandable, given that these companies have outperformed the broader market by between 10- and 33-fold so far this year.
However, each of these technology stocks is riding a powerful trend that will continue to act as a tailwind far into the future. Digital payments, e-commerce, and telemedicine are all just getting started, and while the low-hanging fruit may have already been picked, these trends will continue to gain adoption for years to come.