One way to spot future wealth-building stocks is to look for relatively small companies in their respective industry that have consistently posted high growth rates. Ideally, look for companies that have a much larger addressable market than their current annual revenue. This is a good indicator that the company has plenty of headroom to grow and can likely maintain its high growth rate for many years and fuel a big return for investors.
Two companies that meet these criteria are Farfetch Limited (FTCH +0.00%), the leading global online luxury goods seller, and lululemon athletica (LULU +0.11%), an emerging juggernaut in the athletic apparel industry. Here's a brief review of their operating histories and why the future looks bright for these fast-growing companies.
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1. Farfetch
Farfetch was founded in 2007 and has grown to be the leading e-commerce destination for luxury goods. From 2016 through 2020, revenue grew seven-fold to reach $1.7 billion. More growth like this will almost certainly send the stock higher over the long term, and the company is in a good competitive spot to deliver on that potential.
Farfetch operates a marketplace with over 1,300 brands that sell their goods directly to consumers. As luxury spending shifts online, Farfetch offers a lot of value to luxury brands that lack the means to build their own digital platform to reach consumers globally. Farfetch does it all, handling marketing, technology, and logistics to help many small luxury brands reach shoppers they wouldn't be able to otherwise.
The business is built to grow quite fast and handle adversity like pandemics. Most of the items listed for sale on Farfetch are available from multiple sellers around the world. This gives it an advantage over other luxury e-commerce stores that typically have a few distribution centers.
Farfetch grew revenue by 64% in 2020, and another growth catalyst has emerged that could keep the momentum going over the next several years. Last year, Farfetch entered a joint venture with the Chinese e-commerce leader Alibaba Group and luxury goods maker Compagnie Financiere Richemont that will extend the company's reach to the fast-growing Chinese market. Farfetch will be able to expand its marketplace to Alibaba's Tmall Luxury Pavilion. This significantly improves the long-term growth outlook of Farfetch's marketplace, given the 779 million active customers on Alibaba's retail marketplaces.
The main knock against Farfetch has been its accumulating net losses on the bottom line, but it's improving. In the fourth quarter of 2020, Farfetch reported its first quarter of positive operating profit, measured on an adjusted EBITDA basis. Management is forecasting the first full year of positive adjusted EBITDA for 2021.
The stock price is down about 35% off its 52-week high, but the global luxury industry is valued at approximately $300 billion, providing lots of return potential for investors today. This could be a good time to consider buying shares.
2. Lululemon
Lululemon is a unique breed in the athletic apparel industry. Since its inception in 1998, it has grown mostly through grassroots initiatives. Revenue was just $40 million in 2004, but today, Lululemon is emerging as one of the top athletic brands in the world with revenue of $4.4 billion in fiscal 2020, and it's still going strong.
Even after more than 20 years in operation, it continues to grow in North America, while expanding rapidly in China, Europe, and other regions. Last year, revenue from outside of North America made up 14% of total revenue. Management sees international growth as a big opportunity.
Growing the men's business is also a top priority, where men's products comprised only 21% of total revenue last year even though the men's category has been growing faster than women's.
Building on its grassroots foundation, Lululemon is continuing to invest with the focus of deepening its relationship with a loyal customer base. It acquired tech company Mirror for $500 million last year, the maker of an interactive display that offers access to workout classes from the comforts of home for a monthly subscription fee.
Mirror generates a few hundred million in annual revenue right now, but the long-term benefits of the deal could be significant. By the end of this year, Lululemon plans to accelerate the monetization of the device by opening 200 shop-in-shops in Lululemon stores, just in time for the holidays.
Lululemon has a market cap of $44 billion, putting its price-to-sales ratio at around 10, which isn't cheap. But consider that Nike has a market cap of $208 billion, and Lululemon estimates its long-term addressable market far above the $366 billion global sportswear market. That's because management sees tremendous growth potential as it enters new product categories, such as Mirror and other services.
All said, Lululemon is a long-term compounding machine that could turn a small investment into a large sum.
