Don't get me wrong -- I love the S&P 500. It's a curated stock market index comprised of around 500 of the biggest, most profitable U.S.-based businesses. 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 ocean when it comes to the stock market. There are quite literally thousands and thousands of stocks to choose from. And many outside of the S&P 500 provide life-changing gains.
So, in this article, why not broaden our focus? The Russell 2000 is another stock market index, made up of around 2,000 smaller stocks -- stocks that are valued at $10 billion or less (although there are a few outliers that are worth more).
Just as there are winners to be found in the S&P 500, the Russell 2000 also produced some stocks that enriched shareholders in 2024. The quartet I've selected here -- Sezzle(NASDAQ: SEZL), Rigetti Computing(NASDAQ: RGTI), SoundHound AI(NASDAQ: SOUN), and The RealReal(NASDAQ: REAL) -- aren't necessarily the top four performers for the year. But they're all right near the top.
1. Sezzle: up 1,460%
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 mind-blowing improvements to profitability.
Consider that in 2022, Sezzle had revenue of $126 million but had a net loss of $38 million. Revenue grew by 7% in 2023, allowing it to achieve a net income of $7 million. But this year, it expects to grow revenue by 55%, allowing it to have a net income of nearly $72 million.
Sezzle generates most of its revenue from charging merchants transaction processing fees. So, increasing the number of merchants that accept Sezzle payments would seem to be important, and indeed, the company regularly announces new merchants that are on board. That said, its growth is currently coming from selling 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's jumped up to 529,000 as of the end of the third quarter of 2024. Consequently, investors should watch subscriber numbers in 2025 because they could lead to more big improvements in its financials.
2. Rigetti: up 649%
Since the invention of the computer, everything has operated with binary code -- a system of zeros and ones. Quantum computing intends to provide unimaginably powerful computers by progressing beyond binary code. Rigetti Computing hopes to lead the revolution.
Rigetti stock is up by a sensational amount in 2024, but most of the gains have happened in just the past month. Consider 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 big update with its product roadmap that sent the stock soaring.
For binary systems, the difference between, say, 1 bit and 2 bits is 100%. For quantum systems, however, the difference between qubits is much larger because there are more states represented. For Rigetti, it intends to release a new 36-qubit system by mid-2025 and a new 100-qubit system by the end of 2025. Those might sound small, but these represent large leaps in computational power.
There's still a lot of ground to cover before quantum computers are used regularly for commercial purposes -- Rigetti shareholders need to understand that. But for now, investors should watch to see whether the company hits its release date targets and attracts more users. Progress in these areas in 2025 is important to the long-term health of the business.
3. SoundHound AI: up 539%
SoundHound uses artificial intelligence (AI) to build conversational voice assistants. The technology is promising, and it's gaining traction in fast-food drive-thrus and in cars. However, few investors took notice of it before February. Then, market darling Nvidia revealed that it was a shareholder. This served as the initial catalyst that sent SoundHound stock soaring this year.
After generating just $46 million in revenue in 2023, SoundHound's management expects to generate $150 million in revenue next year. Incredible revenue growth such as this is the central tenet of an investment thesis here. SoundHound estimates its market opportunity at $140 billion.
In other words, if its technology is truly special, then SoundHound should be able to sustain high revenue growth for years to come. It will need to do this if it's going to be a good investment. That's why shareholders should watch for key customer wins in 2025. Investors should also keep in mind that a lot of recent growth has come from acquisitions. So, it will be important to see these new businesses get integrated into the company.
4. The RealReal: up 364%
The RealReal is an e-commerce platform for authenticated, pre-owned luxury goods. Much like Rigetti stock, The RealReal stock only recently skyrocketed. The company reported financial results for the third quarter of 2024 on Nov. 4. That report had investors and professional analysts rethinking their assumptions about the company.
The RealReal sells items on behalf of consignors or, in some cases, it acquires products to resell for itself. The company also generates revenue with other services, such as giving subscription buyers an early glimpse of new merchandise. The problem is that adoption has been declining and profits were nowhere close to expectations. This caused investors to lose confidence completely.
Now The RealReal is returning to growth, with Q3 revenue up 11% year over year. Moreover, active buyers also modestly increased. However, the big thing was that the company generated Q3 free cash flow of $2 million. This represents only the second time it's ever reported positive quarterly free cash flow.
In short, growth and free cash flow have suddenly caused investors to feel much better about The RealReal's long-term prospects. In 2025, investors should watch to see if adoption trends keep going in the right direction.
Is there a stock for investors today?
Among these four stocks, I think that Rigetti and SoundHound are the most speculative. Both are promising, but both need substantial long-term growth from here. For its part, The RealReal is still pretty cheap from a valuation perspective, which could limit some future downside. I'm unsure how big and consistent its core business can be.
If I had to buy one of these four today, I'd choose Sezzle. The adoption trends for its subscription business are impressive, and it's relatively new, giving me optimism that it can keep growing. Moreover, it's a small company with a market cap of less than $2 billion. However, with profits surging as they are, it could still be a rewarding opportunity for investors in the long term.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Sezzle. The Motley Fool has a disclosure policy.
