A fundamental concept to understand if you’re looking to make money is the relationship between risk and reward. While we might all want investments that offer high rewards for low risk, we’re not likely to find many of them. Instead, there are low-risk, low-reward options such as a bank savings account or money market account, and high-risk, high-reward options such as lottery tickets.
There are some other options, though, that offer the possibility of high returns in exchange for less risk than a lottery ticket — for example, there are high-risk, high-reward stocks.
Let’s start with Upwork (NASDAQ:UPWK), which connects freelance and contract workers with companies offering work — and is a platform through which the workers can be paid. This is a great time to be such a company, with more people working from home than were doing so pre-pandemic — and due to the pre-pandemic trend of companies preferring to hire contractors over employees, when possible. The company is growing briskly, with trailing-12-month revenue topping $400 million, versus $235 million in 2018 — and the lion’s share of its users, around 80% of them, have been acquired organically. Its growth potential appears huge: In its investor presentation it cites Gartner research: “By 2024, remote workers will represent 30% of all employees worldwide.”
With so much potential due to the growth of the gig economy, why is Upwork risky? Well, despite its solid revenue growth, its bottom line is still in the red. It also has significant competition, most prominently from Fiverr International (NYSE:FVRR). Even with Fiverr taking market share from it, all is not lost — remember that plenty of industries can support two or even more major players indefinitely. Think, for example, of Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP). Or Ford Motor (NYSE:F) and General Motors (NYSE:GM). Upwork may well coexist with one or more rivals over the long run, each enjoying slices of a massive pie.
Upwork CEO Hayden Brown recently addressed the need to take on competition, noting in a conference call that: “Despite our strong performance over the past year, we haven’t shown a bright enough light yet on our breadth as a core differentiator. That’s why we are introducing our industry category today, calling it the work marketplace from now forward.”
While Upwork is capitalizing on the disrupted economic landscape, Lemonade (NYSE:LMND) is doing its own disruption — of the insurance industry. By making much use of data and algorithms, it’s offering insurance to the masses faster, and often at a lower price, than its establishment competitors. Its stock has seemed pricey to many over the past year, but it has fallen quite a bit in the past few months, and it was recently down nearly 60% from its 52-week high.
So what’s to like about Lemonade? Well, it’s taking on the insurance establishment by offering homeowner, renter, pet, and term life insurance — and in April unveiled Lemonade Car. That’s a big deal, because the auto insurance market is far bigger — estimated at $300 billion annually — than those of Lemonade’s other major insurance lines. Indeed, in its first-quarter letter to shareholders, it noted: “The addition of car insurance to our product suite dramatically increases our total addressable market, as the car insurance market is ~70x renters, ~80x pet health, ~3x homeowners.” The company is growing briskly, too, with nearly 1.1 million customers as of the first quarter, up 50% year over year. Its gross earned premiums rose 84% in the same period.
Despite all this, Lemonade does have ample risk. Its market value, though lower now, is much more like that of a fast-growing tech company than an insurance company. Its use of data and algorithms isn’t exactly revolutionary, either, as even its rivals use them, to some degree. And one or more unforeseen events or poor pricing could end up spelling trouble for the upstart. Interest investors need to learn more to see whether the potential is worth the risk.
Tesla (NASDAQ:TSLA) is a poster child for seemingly risky propositions, yet it has ardent fans as well as ardent critics. A big reason why it’s risky is simply its valuation: It was recently sporting a market cap of $560 billion — more than half a trillion dollars. Compare that with automakers that are selling far more vehicles: General Motors’ recent market cap was $82 billion, while Ford’s was $53 billion. (My colleague Jason Hall has suggested that Tesla should buy Ford — which would change its fortunes considerably.)
Fans of Tesla point to the growing acceptance of electric vehicles and Tesla’s development of autonomous driving technology, and note that sales have been growing briskly, with 12-month deliveries recently up 52% year over year. Critics, though, point to Tesla’s competition, and believe that other carmakers have superior autonomous driving technology and that Tesla’s production is still a drop in the bucket of overall car manufacturing.
These are just three of many growth stocks out there that have great potential, but are also risky, most often because their prices seem to have gotten ahead of themselves. Take a closer look at any that interest you and consider buying into any you believe in in chunks over time — or play it safer and just add them to a watch list, to buy into later, if they fall in price.
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.