Lately, the stock market has been on a wild ride, triggered by the rising yield curve and rotation of investors from growth stocks to value stocks. Correctly timing the market amid such high uncertainty is near impossible. But such times of uncertainty also present an opportunity -- to pick up fundamentally strong stocks at deep discounts.
To leverage this opportunity, investors should opt for stocks riding structural trends, which in turn translates into high chances of solid long-term returns. In case you are in search of such picks and have an extra $5,000 which is not needed to pay bills or for other contingencies, then Square (SQ +0.75%), Datadog (DDOG +4.13%), and Fulgent Genetics (FLGT +6.94%) may prove to be just the right picks for you.
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1. Square
Fintech player Square has emerged as a force to reckon with in the financial services space. The company provides point-of-sale devices and solutions, capital, analytics, and other business services to merchants in exchange for a fee. The company also caters to customers through its peer-to-peer payment platform, Cash App.
The seller ecosystem is a bigger business segment for Square. Despite the pandemic negatively affecting brick-and-mortar retailers, the company processed seller gross payment volume (GPV) of $103.7 billion in fiscal 2020, down year over year by 13.6%. However, the company expects pandemic headwinds to start easing by late March 2021.
Square is no longer dependent only on small businesses -- this is making the seller business more resistant to economic uncertainties. In the fourth quarter, larger sellers with GPV over $0.5 million accounted for almost 60% of the company's total seller GPV.
Cash App is a smaller but much faster-growing part of Square's business. The peer-to-peer platform's monthly active users jumped year over year by 50% to 36 million in December 2020. Individuals use Cash App for performing various financial tasks such as directly depositing and transferring money in their bank accounts, for investing in stocks and Bitcoin (BTC +2.25%), and for using the Square Cash Card (debit card linked with Cash App account). Square's revenues from the Bitcoin exchange jumped by a phenomenal 785% year over year to $4.6 billion in fiscal 2020.
Square is trading at just over 110 times forward earnings. These valuations are quite steep. However, Square estimates its total addressable market to be over $160 billion. The company has pegged its market penetration to be less than 3%. Considering the company's fiscal 2020 revenues of $9.5 billion, the market share comes to only 6%. The company also posted GAAP profit of $213 million in fiscal 2020. With a huge market opportunity, this profitable fintech has much potential to grow in the next few years.
2. Datadog
Cloud-native observability company Datadog offers software solutions to monitor IT infrastructure, networks, applications, user experiences, log management, incident management, and security of an organization -- on a unified dashboard and in real-time. The company has been a major beneficiary of the pandemic-driven corporate digital transformation and cloud migration -- a secular trend that will continue to be a tailwind in the long run. While this hot stock has cooled off after the February tech sell-off and weaker-than-anticipated fiscal 2021 earnings guidance, the company's offerings are still much in demand.
In 2020, the number of Datadog customers paying more than $1 million in annual recurring revenues (ARR) grew year over year by 94% to 97, while those paying ARR of over $100,000 were up by 46% to 1,253. Datadog's dollar-based net retention rate (a metric to gauge the new revenue coming by cross-selling to existing customers) has been 130% for fourteen consecutive quarters, which also includes the fourth quarter. At the end of the fourth quarter, 72% of the customers were using two or more of the company's products, while 22% were using four or more products. The company's "landing and expanding" model seems to have now created a sticky customer base.
Last year, Datadog's revenues soared 66% to $603.5 million, non-GAAP net income came at $71.6 million, and free cash flow was $83 million. For fiscal 2021, the company has guided revenues to grow year over year by 37% to 38% and non-GAAP net income per share to fall year over year by 36% to 54%. However, the fall in earnings is not that big a challenge, considering that Datadog is prioritizing revenue growth over near-term profitability.
Trading at nearly 310 times forward earnings, the stock is pricey. However, considering that the company pegs its addressable market to around $35 billion and is already a dominant player in the observability space, there is significant potential for the stock to go even higher in the coming years.
3. Fulgent Genetics
I have recommended Fulgent Genetics as a great growth stock several times before and I am doing it again -- this genetic technology company which has now turned into a leading COVID-19 testing player has solid potential to grow even after the pandemic.
Fulgent Genetics had a dream run in 2020. Revenues rose by 1,200% to $421.7 million, while GAAP net income improved dramatically year over year from a loss of $411,000 to a profit of $214.3 million. The company processed 4.4 million tests in 2020 -- a stark jump from 60,000 tests in 2019. Fulgent Genetics ended fiscal 2020 with $432 million liquidity and $15.8 million debt on its balance sheet.
Despite the phenomenal results, investors are concerned about COVID-19 testing revenues drying up in the next few years, which in turn will have a dramatic effect on the company's growth trajectory. This concern is reasonable considering that most of the growth in fiscal 2020 came from the COVID-19 testing business.
However, the future of Fulgent's non-COVID testing business -- where Fulgent Genetics is using next-generation sequencing (NGS) technology to diagnose 5,700 genetic conditions based on mutations in over 18,000 genes at an affordable price-- is now secure.
There is now increased brand awareness about the company among customers as well as payers. Once extensively dependent on cash-paying customers, the company has now become an in-network laboratory for several regional payers and has forged relationships with national payers. The company's Picture Genetics platform is making it even more convenient to conduct genetic tests -- both for COVID-19 and non-COVID conditions -- in the comfort of home.
Fulgent's share prices have already increased over 619% in the last year and over 82% so far this year. The company is now guiding for a 90% year-over-year increase in fiscal 2021 revenues to $800 million, which is a very encouraging forecast on the back of an already strong year. Against this backdrop, the company could continue to soar in 2021.
