Don’t get me wrong: I love the S&P500. It is a composite stock market index consisting of approximately 500 of the largest, most profitable U.S. companies. With that in mind, there are always great long-term investment opportunities to be found in this pool.
That said, 500 companies is just a drop in the bucket when it comes to the stock market. There are literally thousands and thousands of stocks to choose from. And many companies outside the S&P 500 offer life-changing profits.
So why not broaden our focus in this article? The Russell 2000 is another stock market index, made up of about 2,000 smaller stocks – stocks valued at $10 billion or less (although there are a few outliers worth more).
Just as there are winners in the S&P 500, the Russell 2000 also produced some stocks that enriched shareholders in 2024. The quartet I have selected here — Sezzle (NASDAQ: SEZL), Rigetti computers (NASDAQ: RGTI), SoundHound AI (NASDAQ: SOUND)And The real real (NASDAQ: REAL) — aren’t necessarily the four best artists of the year. But they are all near the top.
Sezzle is a digital financial company designed to help younger, tech-savvy consumers who don’t have traditional credit cards. The stock is up by a sensational amount in 2024, thanks to impressive growth and stunning improvements in profitability.
Consider that Sezzle had revenues of $126 million in 2022, but a net loss of $38 million. Revenue grew 7% in 2023, generating a net profit of $7 million. But this year it expects to grow revenue by 55%, giving it a net income of nearly $72 million.
Sezzle generates most of its revenue from charging merchants transaction processing fees. So it seems important to increase the number of merchants who accept Sezzle payments, and indeed the company regularly announces new merchants joining. That said, growth currently comes from sales of subscription products.
With a Sezzle subscription product, consumers have more shopping options, among other things. The company ended 2023 with just 307,000 active subscribers, but that has increased to 529,000 as of the end of the third quarter of 2024. Investors should therefore pay attention to subscriber numbers in 2025 as they could lead to greater improvements in its financials.
Since the invention of the computer, everything has worked with binary code: a system of zeros and ones. Quantum computing aims to deliver unimaginably powerful computing by going beyond binary code. Rigetti Computing hopes to lead the revolution.
Rigetti shares are up by a sensational amount in 2024, but most of the gains have only been made in the past month. Remember that quantum computing is still largely in the research and development phase, with a lot of money currently coming from government contracts. However, in its November report for the third quarter of 2024, Rigetti announced a major update with its product roadmap that sent the stock price soaring.
For binary systems, the difference between, for example, 1 bit and 2 bits is 100%. For quantum systems, however, the difference between qubits is much greater because more states are represented. Rigetti wants to release a new 36-qubit system in mid-2025 and a new 100-qubit system at the end of 2025. That may sound small, but it represents big leaps in computing power.
There is still a lot of work to be done before quantum computers are regularly used for commercial purposes. Rigetti shareholders must understand that. But for now, investors should see if the company meets its release date targets and attracts more users. Progress in these areas by 2025 is important for the long-term health of the business.
SoundHound uses artificial intelligence (AI) to build voice assistants. The technology is promising and gaining popularity in fast food restaurants and cars. But few investors noticed this before February. Then, market darling Nvidia turned out it was a shareholder. This was the initial catalyst that sent SoundHound stock soaring this year.
After generating just $46 million in revenue in 2023, SoundHound management expects to generate $150 million in revenue next year. Incredible sales growth like this is the central premise of an investment thesis here. SoundHound estimates its market opportunity at $140 billion.
In other words, if the technology is truly special, SoundHound should be able to sustain high revenue growth in the coming years. It will have to do this if it wants to be a good investment. Therefore, shareholders should look for major customer wins in 2025. Investors should also keep in mind that much of the recent growth has come from acquisitions. So it will be important that these new companies are integrated into the company.
The RealReal is an e-commerce platform for authentic, second-hand luxury goods. Like Rigetti stock, RealReal stock only recently skyrocketed. The company reported third-quarter 2024 financial results on November 4. That report caused investors and professional analysts to reconsider their assumptions about the company.
The RealReal sells items on behalf of consignors or in some cases acquires products to resell for itself. The company also generates revenue from other services, such as giving subscription buyers a first look at new merchandise. The problem is that adoption has declined and profits have not come close to expectations. This caused investors to completely lose confidence.
Now, The RealReal is returning to growth, with third quarter revenue up year-over-year. In addition, active buyers have also increased slightly. Most importantly, the company generated $2 million in free cash flow in the third quarter. This is only the second time the company has ever reported positive quarterly free cash flow.
In short, the growth and free cash flow suddenly made investors feel much better about The RealReal’s long-term prospects. In 2025, investors should look to see whether adoption trends continue in the right direction.
Of these four stocks, I think Rigetti and SoundHound are the most speculative. Both are promising, but both need substantial long-term growth from here on out. In turn, the RealReal is still quite cheap from a valuation perspective, which could limit any future downside. I’m not sure how large and consistent the core business can be.
If I had to buy one of these four today, I would choose Sezzle. The adoption trends for its subscription business are impressive, and it’s relatively new, which gives me optimism that it can continue to grow. Plus, it’s a small company with a market cap of less than $2 billion. But with profits soaring, this could still be a rewarding opportunity for investors in the long run.
Consider the following before purchasing shares in Sezzle:
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Nvidia and Sezzle. The Motley Fool has a disclosure policy.
Tired of hearing only about the S&P 500? Here are 4 of the best performing stocks from this year’s Russell 2000, originally published by The Motley Fool
