3 Stocks That Offer Potentially Explosive Gains

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Finding truly explosive stocks sometimes mean embracing some uncertainty. But identifying even a handful of big winners can more than make up for investments that don't pan out. In a worst-case scenario, you would lose 100% of the money that you've invested into a given stock, but consider that big winners like Netflix and Amazon would have delivered returns roughly 20 times greater than your initial investment if you had held them over the last decade. 

If you're willing to take on risk in pursuit of life-changing gains, read on for a look at three companies that could deliver market-crushing performance.

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1. Cloudflare: Creating a lead position web-security services

With more business and communications moving to digital channels, strong web-based protections have never been more important. Cloudflare (NYSE:NET) is a leading provider of web security and content delivery services. It's nearly certain that you use websites that rely on its technologies on a daily basis. All told, more than 25 million different web properties depend on the company to keep their sites accessible and running smoothly. 

The distributed-denial-of-service (DDoS) attack is one of the most common and easily orchestrated attacks that bad actors can use to take down a website. DDoS attacks function by creating an overload of service requests to a domain, using a flood of bots to overwhelm a server and render a targeted website inaccessible. Cloudflare provides the leading protection against this kind of attack, and having DDoS countermeasures is a base-level requirement for any enterprise or organization that plans to conduct business through the web. 

Cloudflare has a market capitalization of roughly $12.25 billion and trades at about 30 times this year's expected sales. Investors are already anticipating big growth from the company, but there are good reasons to believe that the cybersecurity specialist can exceed the market's current targets.

A leading position in web-security services puts Cloudflare in good position to continue adding customers and growing revenue at a rapid clip. Last quarter, the company grew sales 48% year over year and added more total and large-size customers than ever before. The company is also posting gross margins that point to huge earnings potential, with a non-GAAP gross margin of roughly 77% last quarter and 78% in the last fiscal year. Leadership in its corner of the cybersecurity market could also provide a strong foundation to launch new services that drive big growth over the long term. 

2. Eros STX: Tapping into India's growing appetite for streaming content

As a relatively small entertainment company focused on growth in emerging markets and the sale of films and series that may or may not become hits, there's a healthy amount of speculation involved in charting the trajectory of Eros STX Global (NYSE:ESGC). Investors should proceed with the understanding that the India-based company is a small-cap stock that's prone to volatility. At the same time, it has big growth potential and some notable tailwinds. 

The company's Eros Now subscription streaming platform boasted 205.8 million registered users and 33.8 million paying subscribers at the end of the June quarter, with the latter category expanding roughly 60% year over year. With per-capita spending power in India still at low levels compared with the U.S., Europe, and China, subscription-streaming and ad-supported video services in the country don't generate big money like they do in other markets. That should change as India's economy continues to develop, and the company is looking better-positioned to eventually emerge as a winner in the streaming category.  

The merger of Eros International and STX Entertainment closed at the end of July, bringing the latter's Western-focused film and television production into the fold. The company recently secured $100 million in distribution sales from films it showcased at this year's Toronto International Film Festival, and the STX unit should strengthen the business' reach around the globe and provide some cushion as India's streaming market takes time to mature. 

Despite having a market cap of just $400 million and trading at roughly 40% of management's 2022 revenue target, high debt levels and expenses needed to fund entertainment production mean that Eros STX is a high-risk investment. A favorable backdrop for streaming video doesn't mean that the company will be able to execute at the level needed. The other side of that dynamic is that the company and its stock have truly enormous potential. 

3. Himax Technologies: Hoping for a payoff on some business growth bets

Semiconductor companies can deliver huge gains if they manage to secure new design wins in rising product categories. That's especially true for small-cap companies in the space. Himax Technologies (NASDAQ:HIMX) is a display and imaging chip specialist that's valued at roughly $600 million, and its stock could deliver explosive returns if some of the business' growth bets pay off. 

Himax currently generates most of its revenue from display drivers: chips that regulate colors displayed by pixels on screens used for televisions, phones, tablets, and other devices. Reduced pricing power for the company's current-generation display drivers combined with weakness in the global TV and mobile-device markets has hampered performance, and the company's stock has lost roughly two-thirds of its value over the last three years. There are feasible avenues to a comeback, however, and the stock could be poised for a big rebound.

Himax could see a cyclical rebound in its display driver market, with next-generation phone adoption driven by technologies including 5G, augmented reality, and active-matrix organic light-emitting diode (AMOLED) screens looking like catalysts for a robust upgrade cycle. Sales in the TV category have recently been pressured due to economic conditions created by the coronavirus pandemic, but the company sees demand picking up now that existing inventory has been sold through, and it's also seeing momentum in tablet and teleconference screens amid surging use of video communications.

Himax also has growth opportunities in augmented reality and virtual reality headsets, automotive displays, and machine-vision technologies. While the display-driver business isn't producing much in the way of growth at the moment, Himax continues to have a leading position in the space, and the company's valuation could soar if some of its growth initiatives in other categories are successful. 

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