IIt is not uncommon for fast growing businesses to operate at a loss. Several factors can lead to losses: spending to track or induce demand, for example, or introductory prices on products and services to accelerate customer adoption.
Either way, companies that operate at a loss in the name of growth add risk to investors. It is difficult to predict whether a business can generate healthy profits when it reaches maturity, or even whether the business will survive long enough to reach maturity.
However, the rewards can be magnificent for investors who can pick winning stocks early in their growth phase. Here are two unprofitable growth stocks that have the makings of long-term winners.
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DraftKings (NASDAQ: DKNG) offers a unique set of online gaming services. People can go to DraftKings to bet on daily fantastic sports, bet on their favorite team in mobile sports betting, or bet on casino style games like blackjack.
Because it is a gaming company, it relies on a state government to license it to operate within its jurisdiction. DraftKings is licensed to operate in 15 states with a mobile bookie and only five with iGaming.
The legalization of online gambling is a relatively new phenomenon, and DraftKings is growing along with state approvals. Between 2017 and 2020, DraftKings increased its revenue from $ 192 million to $ 615 million. And he’s accelerated his revenue growth in each of those years, ending 2020 with a 90% increase – a hypergrowth, of course.
Earning profits on the bottom line was another story. The company generates massive losses as it invests in expansion. With each new state licensing DraftKings, the company is aggressively spending on customer acquisition. Plus, with its sportsbook operating in just 15 states and iGaming in just five, spending growth isn’t going to stop anytime soon. In the nine months ended September 30, DraftKings generated an operating loss of $ 1.2 billion, up from $ 574 million in the same period the previous year.
If and when DraftKings reaches maturity, the ROI could be worth it. According to management, the total addressable North American market for iGaming and mobile sports betting is estimated at $ 67 billion per year. From that, DraftKings predicts it can generate $ 6.2 billion in annual revenue midway through. That’s more than 10 times its $ 615 million in revenue in 2020.
Interactive Platoon (NASDAQ: PTON) has grown rapidly in sales of its interactive exercise equipment over the past few years. From 2017 to 2021, revenue increased from $ 219 million to $ 4 billion. Many companies have sold home exercise equipment, but Peloton pioneered connecting equipment with interactive lessons.
Consumers show a preference for exercising at home due to the added convenience of not having to drive to the gym, look for parking, and then find a suitable exercise machine or class that matches. their schedule. Before my gym in Los Angeles closed due to COVID-19, driving the four miles to my house and finding parking regularly took over 30 minutes.
As with DraftKings, profitability has been elusive for Peloton. The company has generated operating losses over the past five years and started fiscal 2022 on a similar note. In its first quarter of fiscal 2022, ended September 30, it lost $ 376 million in net income. The losses result from the price of its products low enough to generate strong customer demand. This plan appears to be working as revenues have increased almost 20-fold from 2017 to 2021. However, that is not enough to generate consistent profits.
Long-term potential lies in its subscription business, which generated a gross profit margin of 66.7% in its last quarter. Once Peloton has enough of their machines inside homes and primarily earns recurring subscription revenue at that 66.7% margin, the end result could still show a profit.
That’s a big ‘if’, but it might be worth it for investors who take the risk and buy Peloton stocks in this early growth phase.
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* Returns of the portfolio advisor as of December 16, 2021
Parkev Tatevosian is the owner of DraftKings Inc. The Motley Fool owns and recommends Peloton Interactive. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.