When the U.S. Federal Reserve’s dot plot was released in June 2020 and showed that the central bank projects to keep rates at zero for the next 18 months, one thought rushed through my head: it’s time to look for growth stocks to buy.
Because low rates are great for growth stocks.
The “fair value” of a stock is equal to the net present value of that company’s future cash flows, plus whatever the balance sheet says the company is worth today. Value stocks derive a lot of value from their worth today (i.e., the balance sheet). Growth stocks, by comparison, derive a lot of value from their worth tomorrow (i.e., the net present value of their future cash flows).
The net present value of those future cash flows goes up when the discount rate goes down. As such, when rates drop, growth stocks are disproportionately large beneficiaries.
And now, with rates positioned to be stuck at zero until 2022, growth stocks are set for 18 months of meaningful out-performance.
With that in mind, here’s a list of the 10 best growth stocks to buy with rates stuck at zero:
- Shopify (NYSE:SHOP)
- Beyond Meat (NASDAQ:BYND)
- Axon (NASDAQ:AAXN)
- The Trade Desk (NASDAQ:TTD)
- Okta (NASDAQ:OKTA)
- Roku (NASDAQ:ROKU)
- Chegg (NASDAQ:CHGG)
- Square (NYSE:SQ)
- NIO (NYSE:NIO)
- Pinterest (NYSE:PINS)
Let’s take a look at what makes each among the best to buy now.
Growth Stocks to Buy: Shopify (SHOP)
First up on this list of growth stocks to buy is arguably the strongest growth stock in the entire market: e-commerce solutions provider Shopify.
The long-term bull thesis on Shopify is compelling. The company is essentially morphing into the modern backbone of retail. That is, as consumers are pivoting from offline to online shopping, retailers and merchants are pivoting from malls to the internet, and e-commerce enabled websites have become the new storefronts.
Shopify is the best in the world when it comes to building those websites, and giving retailers the tools they need to survive in this new e-retail world. As such, the company is powering the next-generation of retail. Over the next few years, as e-commerce adoption rates continue to soar, Shopify’s revenues and profits will soar, too.
The only knock on SHOP stock? Valuation. The stock trades at a rather absurd 50-times sales multiple.
But the valuation becomes less of a problem in a world of zero rates. Thus, over the next 18 months, SHOP stock should brush aside valuation concerns and continue to power higher.
Beyond Meat (BYND)
Up 95% year-to-date, Beyond Meat has been one of the hottest growth stocks of 2020.
And with good reason.
Plant-based meat is the future of meat. Long story short, mostly thanks to the rise of social media, modern consumers are more socially and environmentally aware than ever before. As a result, they are increasingly making consumption decisions based on what’s good for society and the environment. Think electric cars. Or solar energy.
Plant-based meat fits this consumption shift perfectly. Relative to animal-based meat, plant-based meat is better for society (it preserves animal welfare) and the environment (livestock contributes a ton of carbon emissions each year). We are starting to see this shift towards socially and environmentally positive plant-based meat take place. It will only accelerate over the next several years, and as it does, plant-based meat will become ubiquitous across all food channels.
Beyond Meat — thanks to branding, distribution and technology advantages — will sustain its leadership position in this market, and eventually turn into the “Tesla of plant-based meat.”
Despite all that, it’s still tough to stomach the valuation on BYND stock. Shares trade at almost 30-times sales.
But that valuation is much easier to stomach when rates are zero. Consequently, for the foreseeable future, this company’s robust growth narrative will more than offset valuation risks and keep BYND stock on a winning path.
One of the more timely growth stocks to buy on this list is law enforcement technology provider Axon.
Take one look at the news or social media, and it’s easy to see that — right or wrong — the public’s trust in law enforcement is broken. But we can’t live in a world without police. So what has to happen? Things in the law enforcement world have to change, so that trust between the public and the people who keep the public safe is repaired.
Axon will be a cornerstone of that change. The company provides a wide portfolio of next-gen hardware and software technology solutions — like smart tasers, body and dash cameras and a cloud-hosted records management system — the sum of which are geared at modernizing (and therefore optimizing) law enforcement.
Over the next year, law enforcement agencies will allocate more of their budgets towards Axon’s technology solutions, because doing so will help increase transparency, which will help increase trust. To this end, the Axon growth narrative — which has been red-hot for years — is only going to get hotter.
The one thing that could stop AAXN stock? Valuation. At 140-times forward earnings, AAXN stock is trading at double its historically average earnings multiple.
But, with rates stuck at zero, those valuation risks are mitigated, and AAXN stock should be able to leverage sociopolitical tailwinds over the next 12+ months to drive huge gains.
The Trade Desk (TTD)
The Trade Desk sits at the overlap of data and digital advertising, two hyper-growth industries with big potential over the next decade. As such, The Trade Desk is one of the most exciting growth stocks in the market today.
The company operates a market-leading programmatic digital advertising platform that leverages data-driven algorithms to automate and optimize the advertising process. This way of advertising is the future, because it’s more cost-effective, more measurable, more targeted and produces better outcomes.
Consequently, over the next several years, more ad spend will migrate into the programmatic advertising world. As the leading demand-side platform in this space, The Trade Desk will win over the lion’s share of that spend en route to becoming a very large ad tech platform in the multi-hundred-billion-dollar ad world.
The Trade Desk has a market cap of just $17 billion today. Needless to say, the long-term upside potential here is huge.
But so is the valuation. TTD stock trades at 25-times sales and 90-times forward earnings.
So long as rates remain at zero, though, The Trade Desk should be able to brush off its stretched valuation, and TTD stock should keep powering higher.
Okta represents the future of enterprise cloud security. Accordingly, it is one of the best growth stocks to buy for the long haul.
The company has pioneered this idea of turning identity into the defense perimeter. That is, Okta doesn’t believe in creating cloud security solutions that operate like a castle and protect the whole ecosystem. They think those solutions limit employee mobility and workflow flexibility. Instead, Okta believes that a good security solution gets rid of that castle, and in its place, outfits each individual with their own body armor of security, where the armor is that person’s identity (since an identity is, by definition, unique).
This breakthrough concept is at the heart of Okta’s Identity Cloud — an identity-based cloud security solution, which optimizes for employee mobility and workflow flexibility, without compromising on security integrity.
With the world increasingly pivoting towards remote work — and many big companies claiming that the era of office centricity is over — Okta’s Identity Cloud will turn into the gold standard for cloud security over the next few years. As it does, the company’s revenues and profits will soar.
To be sure, OKTA stock appears fully priced for this big growth. The stock trades at over 30-times sales.
But that valuation won’t bring down OKTA stock so long as rates remain at zero, and so long as the fundamental growth narrative remains robust. Both will remain true for the next 12+ months. Consequently, OKTA stock will keep powering higher over the next 12+ months, too.
At the heart of the streaming TV megatrend is Roku — a company that is turning into the cable of streaming TV.
The idea is fairly simple. Over the next few years, the streaming TV world is going to start looking a lot like the cable TV world. There will be a bunch of consumers trying to access a bunch of streaming services, much like cable TV used to comprise a bunch of consumers trying to access a bunch of TV channels.
In the cable TV world, consumers needed a cable box to aggregate all those channels, and allow for seamless discovery and access. The streaming TV world needs the same thing. And Roku is that thing — a centralized software platform, that is both standalone and built into many smart TVs, and which allows consumers to seamlessly discover and access streaming TV content.
Over the next few years, Roku will extend its leadership position as the cable box of streaming TV, at the same time that tens of billions of ad dollars migrate from linear TV to streaming TV channels. Roku will win over a significant portion of those ad dollars, and the company’s revenues and profits will roar higher.
The only concern? Valuation. ROKU stock trades at 10-times sales.
But that valuation isn’t a huge problem in a zero rate world. Consequently, ROKU stock should power higher over the next few quarters.
Like Axon, digital education leader Chegg is another one of the best growth stocks to buy right now given timely tailwinds.
Chegg provides a connected learning platform that is built for the modern student. It’s digital, which is where students spend all their time these days. It’s on-demand. Today’s students have grown up in an on-demand economy ruled by Netflix (NASDAQ:NFLX) and Spotify (NYSE:SPOT). And it’s all-in-one, offering everything from tutoring to solutions to writing help, at a time when students’ favorite platforms like Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN) are also becoming one-stop-shops.
In other words, Chegg has all the ingredients it needs to become ubiquitous across the entire academic world in the future.
That future may arrive sooner than you expect. Thanks to the novel coronavirus pandemic, schools across the nation have closed their campuses and turned to online solutions. In this remote learning world, students have increasingly adopted online academic help tools, of which Chegg is the cream-of-the-crop.
To this end, Covid-19 has significantly accelerated Chegg’s growth narrative.
This acceleration is offset somewhat by a rich valuation. CHGG stock presently trades at 16-times sales, more than double its historically average sales multiple.
But such valuation risks are reduced by zero rates. Consequently, going forward, growth narrative acceleration will power CHGG stock higher.
If Shopify is the e-commerce technology backbone for small-to-medium sized businesses, then Square is the physical commerce technology backbone for those companies.
Yes, e-commerce is the future of shopping. But physical commerce isn’t going away anytime soon. For a few reasons, ranging from the reality that dine-in restaurants can’t go 100% online, to consumers actually enjoying the experience of physically shopping. As such, the offline commerce world — especially in the dining and bakery verticals — has long-term staying power.
That’s good news for Square, which provides a suite of technology solutions to help small businesses modernize their business. The core solution, of course, are Square’s digital payment readers, which enable small businesses to accept all forms of non-cash payment (this is very important, since cash is becoming antiquated). But the company also offers things like payroll management and capital lending services. Plus, the company is diving deep into the consumer side of things with its new peer-to-peer Cash App.
Overall, the growth narrative here is quite robust. That robust growth narrative — coupled with economic reopening tailwinds — should help propel SQ stock higher over the next few quarters.
And that will happen despite the stock’s extended valuation (200-times forward earnings) because valuation risks are reduced by low rates.
One of the smaller stocks on this list, Chinese premium electric vehicle (EV) maker NIO is nonetheless one of the best growth stocks to buy for 2020.
The bull thesis here is very straightforward.
China’s EV market is positioned to explode higher in the back-half of 2020, because of rising consumer awareness, rebounding consumer spending and more widespread government support of EV adoption. As that market does explode higher, the premium EV niche will come into its own, since Chinese consumers tend to have an affinity for luxury items. In China’s premium EV niche, there are essentially two players: NIO and Tesla.
Consequently, over the next six to twelve months, both NIO and Tesla are gong to sell a lot of premium EVs. At a $190 billion market cap, Tesla is fully priced to sell a lot of cars in China over the next twelve months. At a $6.5 billion market cap, NIO is not.
Sure, one could argue that the near-term valuation on NIO stock is rich. It is. Shares trade hands at a steep 6-times sales multiple.
But that valuation doesn’t look that expensive in a world with zero rates. As such, valuation risks won’t hold back NIO stock. Instead, so long as this company successfully executes against its promising growth opportunity in China’s premium EV market, the stock will fly higher.
Last, but not least, on this of growth stocks to buy with rates stuck at zero is Pinterest.
The Pinterest growth narrative is very promising. With Pinterest, you have a large social media platform, with a unique discovery and inspiration value prop, and a sticky 300+ million monthly active user base. That huge and sticky use base is under-monetized today. Average revenue per user rates sit around 77 cents. That pales in comparison to the $2+ rates seen elsewhere across the industry.
Yet, if anything, Pinterest should have a higher ARPU because ads will seamlessly fit into the platform’s feed, while its users are action-oriented individuals who are more likely to click on a targeted ad than non-action-oriented individuals aimlessly scrolling through Facebook feeds.
As such, Pinterest has a unique and compelling opportunity to significantly scale its advertising business over the next few years. As they do, the company’s revenues, profits and stock price will all soar.
Sure, the valuation may seem rich today, at 10-times sales. But, as is consistent with the theme of this gallery, zero rates reduce valuation risks and will allow strong growth to power big gains in PINS stock.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long SHOP, BYND, TTD, OKTA, ROKU, CHGG, SQ, NIO, PINS, NFLX, FB and AMZN.