It’s been a terrible year for hypergrowth investments. With interest rates soaring and risk appetites disappearing, many former high fliers have crashed and burned in 2022. But while financial conditions have tightened, there’s no shortage of ongoing innovation that can lead to strong investor returns once sentiment picks back up.
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With high-risk, high-reward stocks, there’s less certainty of future returns. There’s a reason these picks have all seen their share prices plunge in 2022. However, if things go right, these seven high-risk, high-reward stocks could all be “multibaggers,” or stocks that soar several times higher than the purchase price, in the years to come:
— Unity Software Inc. (ticker: U)
— UiPath Inc. (PATH)
— Spire Global Inc. (SPIR)
— Datadog Inc. (DDOG)
— C3.ai Inc. (AI)
— Dutch Bros Inc. (BROS)
— Neogen Corp. (NEOG)
Unity Software Inc. (U)
Unity is a software company whose main asset is its Unity graphics engine. Today, Unity is primarily used to power video games. Its appeal is that it is easy for developers to learn to use, and it works across multiple platforms. A game developer can build a game for, say, PCs, and quickly port it to consoles and smartphones. Unity has a particularly strong position on mobile, where an estimated 70% of leading apps use Unity’s engine.
Going forward, virtual reality offers a huge opportunity for Unity, as it has the easiest-to-use graphics engine for creating augmented and virtual reality applications. The company is also working on broadening its graphics tools into non-gaming uses such as video animation, architecture and 3D commerce. Unity hasn’t fully monetized its technology, and there are concerns around its advertising business. But if it can iron these problems out, the upside could be tremendous.
UiPath Inc. (PATH)
UiPath is a software company focused on process automation. As the company’s motto goes, “We make software robots, so people don’t have to be robots.” Specifically, UiPath’s technology allows companies to automate repetitive data entry functions. Instead of having to pay skilled workers to do thankless tasks such as entering data from a website into a spreadsheet, a UiPath software robot can be deployed to do this automatically. This saves tons of human labor, allowing workers to spend more time on functions where they can use their expertise effectively.
The company has grown with tremendous speed, jumping from $336 million in revenue in fiscal 2020 to an estimated $1 billion for fiscal 2023. However, UiPath is only marginally profitable. It was also founded in Romania and retains substantial operations in Eastern Europe, thus raising some concerns due to Russia’s invasion of nearby Ukraine. However, for investors with a high risk tolerance, UiPath looks like it has a tremendous growth trajectory ahead of it.
Spire Global Inc. (SPIR)
Spire Global is one of the various space industry-related special purpose acquisition companies, or SPACs, which came out in recent years. Like most of these space SPACs, Spire has struggled in the public markets. After briefly hitting $20 per share in the initial excitement, Spire stock now sells for less than $2 per share. However, investors shouldn’t give up on the company yet. Spire focuses on the monitoring portion of the space industry. To put it simply, Spire collects data in space to solve problems on Earth.
Firms hire Spire to collect satellite data. Spire does so, and then performs predictive analysis on it and offers tailored solutions and consulting to its end customers. Spire believes this multipronged approach will allow it to deliver a better product and in turn generate higher profit margins than its rivals in the Earth observability market. The company hasn’t reached profitability yet, but it is already on pace to generate $80 million in revenue this year and an estimated $124 million next year.
Datadog Inc. (DDOG)
Datadog is a software-as-a-service, or SaaS, company providing monitoring and security functions for cloud computing. Datadog’s purpose is to provide clients with an all-in-one network-monitoring platform that works across an enterprise’s servers, workflows, databases and other assorted locations. Traditionally, these have been siloed and thus caused certain blind spots to develop within enterprises. Datadog has been a leader in providing complete observation functions, thus improving cloud performance and security. Customers have rewarded Datadog for its innovative product; revenues are up from just $101 million in 2017 to an estimated $2.2 billion in 2022.
Datadog is also profitable already on an earnings-per-share basis. Shares aren’t cheap, by any means. But Datadog isn’t burning cash, and it continues to post some of the strongest revenue growth numbers of any SaaS company today. With shares down 50% year to date through Oct. 25, Datadog is a pure growth holding at a more reasonable price.
C3.ai Inc. (AI)
C3.ai is an enterprise-focused artificial intelligence company. Its software helps clients design AI-powered tools for analyzing, processing and visualizing data. The company’s largest contracts have historically been in the oil and gas industry. Product features include things such as predictive maintenance, which helps firms understand the life cycle of machinery and plan repairs on a more optimal cycle. Recently, C3.ai has made major headway selling to the government, including landing a $500 million contract with the Department of Defense.
Despite the positive operational momentum, C3.ai shares have now lost 90% of their value from their peak as investors shun high-growth, money-losing firms. However, the company has about $900 million in cash against its $1.3 billion market capitalization, meaning investors are paying just $400 million or so in actual enterprise value to own a business doing about $260 million or so in business per year and growing.
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Dutch Bros Inc. (BROS)
Dutch Bros is a rapidly expanding coffee chain. Starbucks Corp. (SBUX) has long dominated the upscale coffee business in the United States. However, Dutch Bros is seeking to upend that positioning. Starbucks appeals to millennials who like its sit-down “home away from home” vibe. However, the pandemic has changed the need for such spaces, particularly with younger consumers. Dutch Bros, by contrast, is targeting Gen Z — also known as zoomers — with a different approach.
Dutch Bros drinks tend to be sweeter and feature bright colors and unusual flavor pairings. These drinks work very well with consumers looking for eye-catching photos to put on social media. In addition, most Dutch Bros locations have tiny retail footprints, meaning the cost of building a new location is modest. Dutch Bros is only marginally profitable and shares are expensive at today’s price. But the company is seeking to grow its store base eightfold in coming years, which could make BROS stock a huge winner through the 2020s.
Neogen Corp. (NEOG)
Neogen is a leading animal health and food safety company. The first division makes antibiotics, vaccines, medical tests and so on primarily for livestock and other farm animals. The food safety side helps packaged foods companies and restaurants ensure that their items are free of toxins and pathogens, and that items comply with local health regulations. Neogen stock has slumped 74% year to date through Oct. 25. Neogen shares were going for more than 50 times earnings at the start of the year as investors overpaid for the perceived safety and strong growth prospects of this industry.
On top of that, Neogen just completed a complicated merger with the food safety division of 3M Co. (MMM), which diluted the share count and added a lot of debt. Dating back to the turn of the century, however, Neogen has grown revenues and earnings at a double-digit annualized rate, and will earn investors a fortune if it can return to that trajectory following this current disastrous year.
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Update 10/26/22: This story was published at an earlier date and has been updated with new information.
