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2 High-Growth Stocks That Could Go Parabolic

When stocks head into a bear market, high-growth stocks with minimal or negative current earnings can get hit extra hard. This seems to be occurring right now in this market sell-off, with many fast-growing software, technology, and internet stocks down 50% while the market is only down around 10%.

When these corrections occur, it can provide fantastic buying opportunities for any investor with a long time horizon. Two high-growth stocks in a sell-off that could go parabolic over the next decade are Latch (NASDAQ: LTCH) and Coupang (NYSE: CPNG). Here's why.

Image source: Getty Images.

Latch

Latch is an electronic hardware and software provider for residential and commercial buildings. With these hardware and software tools, property managers have an easier time managing a building. When Latch sells to a building, it installs smart locks onto every unit entrance, outside door, and shared space in the building. Then, with the LatchOS software (which is for property managers) and the Latch App (which is for tenants), people in the building are able to enter whatever rooms they should have access to through their mobile device, eliminating the need for a key. Users are also able to unlock doors in the building through just the mobile application.

Because of the benefits of the LatchOS, Latch is able to charge a subscription fee to building owners who use the products. According to management, this typically is around $7-$12 per month per apartment unit, depending on how many products the building buys. What's even better from a business perspective is that Latch customers are willing to pay for multiple years of subscription fees upfront once a building becomes operational, giving Latch great cash conversion on its contracts. For investors, since hardware sales have low margins and are basically sold at cost, software bookings and software revenue are the most important metrics for evaluating Latch's success.

Currently, both of these numbers are growing in the triple digits, albeit from a small base. In Q3 of 2021, software revenue was $2.1 million, up 115% year over year. Software bookings, which is the amount of future software revenue signed under contract in the period, grew a whopping 237% year over year in Q3 to $56 million. Why the discrepancy between software revenue and bookings? Since real estate projects take many years to build, a lot of Latch's contracts are not operational and therefore not generating revenue yet. However, software bookings can give a good insight into future software revenue. With software bookings growing over 200% right now, software revenue growth should accelerate over the next two to three years.

Latch currently has a market cap of $830 million. This might seem expensive relative to Latch's software revenue, which is expected to only be $11 million this year. However, management is guiding for it to inflect rapidly over the next few years, possibly hitting over $400 million in 2025. With software gross margins above 90%, it is likely Latch stock will do well over the next five years if it can hit this 2025 software revenue target.

Coupang

Coupang is a South Korean e-commerce company that has gained customers rapidly in the country over the last few years. Even though it was only started in 2010, the company has an estimated 16% market share in South Korea as of 2021.

How did the company achieve this status so quickly? By focusing on fulfillment, delivery, and a quality customer experience. Unlike even Amazon, which is much older and larger, Coupang does all its logistics and delivery itself and has built out a huge amount of infrastructure in its home country to keep up with demand. For example, in the first nine months of 2021, Coupang added 8 million square feet of infrastructure to its network.

These investments are expensive and will require billions of dollars in capital expenditures over the next few years. However, I believe in the long run it will be worth it because of the advantage it gives Coupang over its e-commerce competitors. Nobody can offer the same-day delivery, ease of returns, and low prices like Coupang in South Korea, which is why it has gone from only 7.4% market share in 2017 to over double that today. On top of this defensibility, the logistics network gives Coupang the optionality to add on other services. It has already done that quite successfully with Rocket Fresh and Coupang Eats, its grocery and food delivery services, which have gotten popular with consumers in South Korea in the last few years.

In Q3 of 2021, Coupang put up 46% year-over-year revenue growth, hitting $4.6 billion in the period. In 2022, the company should do well over $20 billion in sales if it can put up anything close to this current growth rate. With a market cap of $32 billion, that puts the stock at a forward price-to-sales ratio well below two. This isn't a screaming bargain, given Coupang's gross margin is only 16% right now. But if the company can keep up this impressive growth rate in South Korea, while continually adding new services to its platform, it could be worth much more than $32 billion five or 10 years from now.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brett Schafer has no position in any of the stocks mentioned. The Motley Fool owns and recommends Amazon, Coupang, Inc., and Latch, Inc. The Motley Fool has a disclosure policy.


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