3 risky stocks with huge upside potential

Meveryone wants to hold only “safe”, “mature” or “boring” stocks, and ignore opportunities on the risky side of the stock market universe. This creates a pool of risky stocks with huge upside potential. And often, these stocks can be bought at a relatively low price, which makes the risk/reward ratio very attractive.

The stock market does its best to value these investments. And that often fails, miserably. This is why these stocks can be so incredibly volatile. But if you can withstand the volatility, small investments in risky stocks can reward you big. Here’s why risk-tolerant investors might consider stocks Pieris Pharmaceuticals (NASDAQ: PIRS), Silvergate Capital (NYSE:IF)and Shopify (NYSE: SHOP).

Image source: Getty Images.

1. Shopify is somewhat risky

Shopify is my favorite store. It is obvious. The company has profit margins of 63% and revenues jump 41%. I’ve been in love with Shopify since Amazon (NASDAQ: AMZN) tried to compete with them – and gave up. Shopify is the back-end solution that every family retailer wanting to start e-commerce needs.

What is the risk of buying Shopify? The stock could become cheaper in the short term. The risk here is therefore a valuation risk. Shopify trades for 26 times earnings. A year ago, the company was trading for 400 times its earnings. So right now the market is incredibly negative on Shopify. The title is down 63% in five months. It’s an accident, my friends.

SHOP Chart

SHOP data by YCharts

A “red flag” for Shopify is that the company is investing aggressively in its business, building warehouses so internet retailers can subscribe to its offerings and provide Amazon-like service. The Internet transformation of our economy is the major trend of my life as an investor.

While Shopify’s profit margins are likely to suffer over the next few years, it should solidify its lead in this area, giving the company a powerful advantage as its technology becomes increasingly essential in internet commerce. Don’t worry about volatility. It’s an amazing business, and it’s on sale right now.

2. Silvergate Capital is risky

Silvergate Capital, like Shopify, is a very profitable business. It is surprising. Often, if a company is growing its revenue by 85% from a year ago, you can expect it to spend a dime a dozen to achieve that speed. For example, Snowflake has no benefits, MongoDB has no benefits, and Okta has no benefits.

Yet here is Silvergate Capital with 45% profit margins. Silvergate achieves this because it is not a tech stock, but a fintech stock with an emphasis on “financial”. Silvergate Capital is a bank. Many years ago, Silvergate made a risky bet on a new phenomenon called cryptocurrency. The bank wanted to land new crypto trading exchanges like Coinbase and Gemini as customers of the bank. Silvergate has therefore tried to resolve the pain points of these exchanges.

Specifically, 24/7 crypto transactions. And yet, at the time, no banking system could keep up with this pace. Silvergate has therefore invested in and built the Silvergate Exchange Network (SEN), a private exchange that allows bank transfers of dollars regardless of the time of day.

This bet paid off. The SEN was a huge success. Like Bitcoin (CRYPTO: BTC) and other cryptocurrencies were skyrocketing, more and more of these exchanges needed a banking partner. Demand was so high that Silvergate eventually shut down its traditional banking business and focused on this new crypto market. At the end of 2021, Silvergate had 1,381 banking customers who were made up of crypto-trading exchanges and institutions interested in this new asset class. Silvergate also had $14.3 billion in deposits, up from $5.2 billion the year before.

In my view, the risk to Silvergate from the big banks is minimal. It is in the catbird seat at the moment and has earned the trust of its banking customers over nearly a decade of service. So what makes it a risky action? On a macro level, we don’t know what will happen with the crypto universe and how big (or big) it might become. This risk therefore remains. But if you want to minimize your risk while enjoying the crypto boom, Silvergate is arguably the best place to start.

3. Pieris Pharma is super risky

Unlike Shopify and Silvergate, Pieris has no revenue. It is a biotechnology without any drug on the market. It’s actually common in the biotech world, especially among small and micro caps. Every year, it seems like the biggest loser in my stock portfolio, by percentage, is a biotech with bad news.

So why invest here? Well, sometimes a calculated risk pays off, like my investment in Novavax (NASDAQ: NVAX) at $7 (and a double-down at $4). This biotech climbed to $330 per share. I am invested in Pieris with the aim of replicating my Novavax success. Pieris, like Novavax in 2019, is a title that cannot go anywhere. So my investment here is tiny (less than 1% of my investment assets). But the upside potential is vast.

Pieris owns the rights to an entirely new class of pharmaceuticals called Anticalins. They are therapeutic proteins similar to antibodies, but eight times smaller – so they can go where antibodies cannot reach. For example, Pieris has an asthma drug candidate that looks like an antibody treatment. But because it’s so small, the Pieris molecule can reach the lung directly, something antibodies can’t.

Pieris has collaboration agreements with rock, Astra Zeneca (NASDAQ:AZN)and seagen (NASDAQ: SGEN). And these pharmaceutical companies have made upfront payments to Pieris to acquire rights to some of biotech’s most advanced drugs. Big Pharma pays for early clinical trials, and if drugs reach certain milestones, payments increase.

If Pieris completes all the stages of these three contracts, the company will benefit from an $8 billion windfall. For a small micro cap, this is a huge advantage. (And that doesn’t include future royalty payments.) But what’s really exciting is that Pieris owns the entire library of Anticalin molecules, 100 billion of them. If one of these molecules is successful, then we could see Anticalins begin to take a significant share of the antibody market (approximately a $145 billion market).

Right now, the scholarship assumes that Pieris’ drugs will fail. Biotech therefore has a tiny market capitalization of $229 million. But what if biotech defies the odds and its Big Pharma partners report success? The upside potential is phenomenal. We should know more as Pieris reports Phase 2 efficacy data later this year.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Taylor Carmichael owns Amazon, Coinbase Global, Inc., Novavax, Pieris Pharmaceuticals, Shopify and Silvergate Capital Corporation. The Motley Fool owns and recommends Amazon, Bitcoin, Coinbase Global, Inc., MongoDB, Okta, Pieris Pharmaceuticals, Seagen Inc., Shopify and Snowflake Inc. The Motley Fool recommends Silvergate Capital Corporation and recommends the following options: long January 2023 1,140 $ calls on Shopify and short calls of $1,160 in January 2023 on Shopify. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Garland K. Long