Shares in Square, Inc. (NYSE: SQ) , Paycom Software, Inc. (NYSE: PAYC) , and Alarm.com (NASDAQ: ALRM) are hitting 52-week highs, but despite their recent run-up, I believe these stocks could go even higher. Will these stocks make me look crazy for recommending them at these highs, or will rapid sales growth make me look savvy in a few years? Read on to find out why I'm betting on the latter.
Big things come in tiny square packages
A tiny square device plugged into a wireless device so that people can process payments on the go is turning payment processing on its head, and in the process, it's making Square and its investors a pile of money.
The company's devices have democratized retail by giving small businesses and individuals an opportunity to benefit from the safety, security, and convenience of accepting credit cards. Today, Square's not only found at food trucks and flea markets, it's also powering transactions at your local gift and coffee shop.
Despite its fast growth (annual revenue has shot up to $1.71 billion in 2016 from less than $375 million in 2013), there's still plenty of opportunity to carve away market share. Management pegs their existing market share at just 3%, and they think that their addressable market opportunity eclipses $26 billion per year.
What's really intriguing about this growth story, however, is the opportunity to expand into markets adjacent to payments processing. If you include those markets, then the addressable opportunity soars to $60 billion in the United States alone.
Obviously, Square won't capture all that business, but it doesn't have to capture much of it to drive sales significantly higher or fuel additional gains in its stock price, especially as sales growth gets leveraged against fixed costs for earnings upside.
Consider this point: Square's sales were $461 million in the first quarter, up 22% year over year, and that was without enjoying any sales from Starbucks , which left Square in the fourth quarter. Despite losing that big customer, Square not only delivered 20% plus top-line growth, but it also made big headway toward profitability. Its adjusted net income per share in the first quarter improved to $0.05 from a loss of $0.05 last year, and that has the company expecting to deliver earnings per share of between $0.16 to $0.20, up from $0.04 in 2016.
Get paid twice
Pick up shares in Paycom Software and you'll get the chance to profit from its fast-growing payroll processing business.
Paycom Software payroll and benefit services use cloud-based software to make it a breeze for small- and mid-sized companies to manage payroll and benefits programs. A desire by customers to bring all of their human resource services into the cloud for better analytics propelled quarterly sales above $100 million for the first time in the first quarter.
Revenue was $119.5 million in the quarter, up 33% year over year. That's impressive, but bottom-line growth was even better. Non-GAAP adjusted EPS clocked in at $0.47 per share, up 43% from last year. Following those results, management thinks it will deliver full-year sales of at least $426 million, up from $329 million in 2016.
This market is undeniably competitive, but there's plenty of business that Paycom Software can still win. Right now, it's only working with about 18,000 of the 28 million small businesses in the country. Want one more reason to like this company's stock? Paycom Software CEO Chad Richison owns 13% of it, and that means he's as eager to see this company succeed.
Smarten up your portfolio
Smart homes are one of the biggest trends coming, and as more devices in homes connect to the internet, Alarm.com should be able to come up with increasingly more ways to profit.
Already, Alarm.com provides monthly subscriptions to 5 million households worldwide, up from 1 million in 2012. These clients use smartphones, tablets, or PCs to secure their homes, control their lighting and heating, and manage their other internet-connected devices using a dedicated internet connection.
Clients can see when people are coming or going, and if doors are opened or closed. Alarm.com can shut off a furnace when a carbon monoxide detector goes off, and it can alert the fire department if a smoke detector sounds. If something triggers a motion sensor, it can even text you a snapshot picture of it.
Sales have grown by a compounded 28% per year since 2012, and in the first quarter, revenue was $74 million, up from $59 million last year. Overall, this company enjoys a steady stream of recurring subscription revenue, it's profitable, and it's got a 93% retention rate. Perhaps most importantly given its share price is at all-time highs, we're only in the early innings of the Internet of Things trend. Given that only about 5% of the planet's households are smart homes so far, I think this business will be a lot bigger in a few years than it is today, and if I'm right, then buying it now will prove to be profit-friendly.
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Todd Campbell has no position in any stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Paycom Software and Starbucks. The Motley Fool recommends Alarm.com Holdings. The Motley Fool has a disclosure policy .