Markets

2 Stocks That Offer Explosive Potential Returns

2020 has been a wild ride for investors. The Dow Jones Industrial Average, which is an index of 30 top stocks, had its biggest point drop ever in March, and as of this writing is flat year to date. Many companies have completely recovered from their March lows, and some have even seen huge gains. But have no fear, you can still add huge gains to your portfolio if you buy shares of Square (NYSE: SQ) and Etsy (NASDAQ: ETSY).

Powerful financial tools for businesses and individuals

If Square only offered tools for the small business angle it started out with, it would be a growing company. It created the original little white card reader that makes it easy for small businesses to swipe credit cards through a smartphone or other device, and it built on that with a large suite of small and medium business tools. Square now provides an ecosystem of financial and operational solutions all in one place.

But it has expanded with Cash App and a trading platform that are fueling high growth. Cash App users increased to 30 million in June and active transacting users grew to 7 million. Square considers Cash App a separate and whole ecosystem with various features such as cash card, bitcoin trading, and direct deposit, in addition to its foundation of peer-to-peer trading.

Woman looking at a computer and writing in a florist shop.

Image source: Getty Images.

The second quarter was mixed, as strong revenue was mingled with pandemic-induced small business woes. Net revenue grew 64% over the prior year fueled by bitcoin trading, and gross profit was up 28% over the prior year, but there was an $11 million net loss. And gross payment volume declined 15% because of lockdown orders, but increased sequentially each month.

The fintech, or financial technology, company has a strong rival in PayPal (NASDAQ: PYPL), the leader in peer-to-peer payments and seller tools. But Square has carved out its own niche in the seller and payments space with its focus on offline as well as online and ease of use. Square's decision to diversify its businesses gave it traction during the second quarter, and helped it gain higher revenue despite a slowdown in the economy. With a $160 billion addressable market and the management and innovation to gain market share, Square's growth prospects are sky-high. Shares are up more than 200% year to date and trade at more than 300 times earnings. That's not typically a reasonable valuation, but as the economy improves and earnings turn positive, that number will come down, and the stock still has tremendous upside.

An online marketplace with a niche product line

Etsy's distinctive business is its moat, which means that it's different enough from other companies and its lead is so wide that it would be hard to challenge. Etsy is an online marketplace for handmade and antique items that aren't mass-produced and aren't available in other stores. The king of all online retail, Amazon.com (NASDAQ: AMZN), did try to imitate Etsy's success but couldn't pull it off.

Under the leadership of CEO Josh Silverman, Etsy has improved its search function and added more buyer capabilities for a smoother shopping experience. It introduced augmented reality features so customers can visualize products in their homes. It has inked deals with celebrity "makers" and created a community of sellers and buyers through blog posts, forums, and product recommendations. All of these moves drive an engaged and loyal customer base.

A woman making hand-made items in front of a computer

Image source: Getty Images.

The company was perfectly poised to benefit from COVID-19 trends as a fully online business, and management has galvanized the seller community to meet mask demand. During the second quarter, active sellers grew 35%, but more importantly, active buyers grew 41%. Previously, sellers were outgrowing buyers, but the pandemic turned that metric around. Revenue grew 137% to $429 million, and gross merchandise sales, which measures sales volume, increased 147%. It wasn't only masks sparking the move, as non-mask sales grew 93%.

There's so much room for Etsy to grow. It keeps getting better, launching saved searches and seller video uploads in the second quarter to enhance the shopping experience. It made its first acquisition in Reverb, and there will be more opportunities to expand horizontally. There was a 51% increase in repeat buyers in the second quarter, an indication of a sustainable business.

Etsy stock is up 200% year to date and isn't cheap either, trading at 120 times 12-month trailing earnings. But with so much future potential, its stock could see explosive growth.

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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. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Etsy, PayPal Holdings, and Square and recommends the following options: short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and long January 2022 $75 calls on PayPal Holdings. 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.

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