Starting with $1,000 is a great way to start investing. However, since that’s a limited sum, new investors may want to put that cash into stocks with the potential to deliver high returns. And consumer discretionary stocks like Etsy (NASDAQ:ETSY) and GrowGeneration (NASDAQ:GRWG) could fulfill that desire for strong growth.
Only artisans, craft suppliers, and purveyors of vintage goods may offer their wares on Etsy. But more than serving as a platform for sellers of such goods, it offers those sellers a community.
The Etsy community also offers resources to its small business clientele — everything from helping them optimize keywords so they can better connect with potential customers, to providing tips to run their businesses more efficiently. Etsy even advocates on behalf of its community in the halls of Congress and before other political bodies.
Its financial results seem to validate that value proposition. During the first quarter, revenue rose around 142% versus year-ago levels to $551 million. This led to a net income of $144 million, a 1,048% spike over the same period. Keeping the increase in the cost of revenue and operating expenses well below its revenue growth rate allowed for most of this profit increase. Those results also compare favorably to 2020’s numbers: Last year, revenue increased 111% from 2019 levels while net income grew by 264%.
Nonetheless, as the U.S. emerges from the COVID-19 pandemic, management expects a sales slowdown. Even though it appears many of the new customers who discovered the site during the pandemic are sticking around, the company declined to offer full-year 2021 guidance. For Q2, it expects its revenue growth rate to slow down to somewhere in the 15% to 25% range.
Free cash flow also improved dramatically in Q1, rising by 410% year over year to $148 million. Moreover, Etsy holds about $1.7 billion in liquidity. Even though debt rose by about $240 million to just over $1.3 billion, its existing liquidity and cash flow should make its obligations manageable.
Furthermore, even with a sell-off earlier this year, Etsy stock has more than doubled over the last year. Despite this surge, the P/E ratio has fallen from over 130 to just under 50 during that period.
That multiple may seem high as revenue growth slows amid the return of in-store shopping. Nonetheless, with double-digit income growth likely to continue, Etsy’s march higher will probably continue over time.
GrowGeneration may not have yet become a household name, but it is a fast-emerging retail chain that profits from selling equipment and supplies for growing cannabis. It currently operates 55 stores between California and Maine. As legal restrictions on marijuana steadily loosen, GrowGeneration’s potential market continues to expand rapidly.
The company expects to grow to 100 stores by 2023, and it has set a goal of operating in all 50 states. GrowGeneration also continues to expand its portfolio of private label products. These offerings can bring a level of specialization not found with the numerous other competitors in the industry. Additionally, while Home Depot and Lowe’s also sell hydroponic products, they likely will lack the shelf space to offer GrowGeneration’s level of specialization.
The company’s growth certainly shows this demand. In the first quarter of 2021, record revenue of $90 million represented a 173% increase from the same quarter last year. The company also earned $6.1 million during the quarter compared with a Q1 2020 reported loss of $2.1 million. Limiting operating expense growth to 59% contributed to the positive net income.
Investors should not assume this was a one-time event. Revenue in 2020 increased 143%, and net income surged 203% from 2019 levels. Also, same-store sales rose 63% for the year, exceeding the 53% increase in Q1 2021. Furthermore, considering the company revenue growth projection of between $450 million and $470 million for 2021, the triple-digit increases should continue for the foreseeable future.
Admittedly, much of this growth happened due to share dilution as the 58.4 million basic shares outstanding far exceeds the 37.8 million available at the end of Q1 2020. Nonetheless, GrowGeneration invested the proceeds back into the company as the store count has approximately doubled since that time.
It also did not stop the stock from moving higher, as the share price has surged by just over 480% over the last 12 months. Interestingly, the P/E ratio of 180 has fallen during that period. Moreover, considering the earnings growth, that multiple may not deter investors. As increased cannabis legalization continues to fuel production, GrowGeneration will likely continue to bring growth to its long-term stockholders.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.