Billionaire Pimco co-founder Bill Gross — often dubbed the “bond king” of Wall Street — wrote in a recent investment letter something very interesting and astute about growth stocks.
“A drop of 150 to 200 basis points in real long-term interest rates, which has occurred in recent few years, can impact the price of Apple or Amazon by as much as 50%, everything else being equal, and they have,” Gross wrote.
This is a spot-on analysis. A plunge in interest rates has propped up growth stocks in 2020.
The idea is simple.
Stocks are valued based on the net present value of the underlying company’s future cash flows. The discount rate used to calculate that net present value is benchmarked to interest rates. So, when interest rates go lower, so does the discount rate. The lower the discount rate, the higher the net present value.
Of course, this dynamic pushes up all stocks. But it disproportionately benefits growth stocks, since such stocks derive more value from future cash flows than value stocks.
Some investors — like Gross — believe this dynamic will come to an end soon. It if does, growth stocks could be in for a world of hurt.
Others — like myself — believe that persistent deflationary factors, such as technology, globalization and automation, will keep us stuck in a low interest rate world for the foreseeable future.
With that in mind, let’s take a look at 10 of the market’s strongest growth stocks that are being propped up by interest low rates today:
- Shopify (NYSE:SHOP)
- Okta (NASDAQ:OKTA)
- The Trade Desk (NASDAQ:TTD)
- Twilio (NYSE:TWLO)
- Carvana (NYSE:CVNA)
- Adobe (NASDAQ:ADBE)
- Splunk (NASDAQ:SPLK)
- Roku (NASDAQ:ROKU)
- Square (NYSE:SQ)
- Atlassian (NASDAQ:TEAM)
- Tesla (NASDAQ:TSLA)
- NIO (NYSE:NIO)
- Amazon (NASDAQ:AMZN)
- Wayfair (NYSE:W)
- Advanced Micro Devices (NASDAQ:AMD)
Here’s a closer look at what you should know about each.
Growth Stocks to Watch: Shopify (SHOP)
The Fundamentals: Shopify is morphing into the technology backbone of modern commerce, by providing retailers of all shapes and sizes with the tools they need to create and maintain robust online selling operations. As consumer spending continues to migrate into the online channel, merchant and retailer demand for Shopify’s infrastructure solutions — which include website building software, online marketing tools and omni-channel selling capabilities through platforms like Instagram — will soar.
The Numbers: Shopify should be able to leverage e-commerce tailwinds to power 15%+ revenue growth over the next decade. Profit margins should improve with scale. Earnings per share should run towards $55 by 2030. Based on an application software sector-average 35-times forward earnings multiple, that implies a 2029 price target for SHOP stock of $1,925. Discounted back by 10% per year (my usual discount rate), that implies a 2020 price target of approximately $815. Using an 8.5% discount rate (the implied cost of equity using a normalized risk-free rate), that implies a 2020 price target of approximately $920. Based on a 7% discount rate (the cost of equity using today’s 1% 20-Year Treasury Yield), you get a 2020 price target of approximately $1,050.
The Game Plan: Sell SHOP stock in 2020 on rallies above $1,050. Add exposure on dips to $900. Buy the dip aggressively on dips to $800.
The Fundamentals: Okta has pioneered a breakthrough concept in cloud security wherein the company turns identity into the security perimeter, essentially eliminating the need for a central security system which protects the whole ecosystem, and replacing it with a decentralized security system which protects each individual identity in the whole ecosystem, and by extension, protects the whole ecosystem, too. This cloud security solution, packaged in Okta’s core Identity Cloud platform, is built for the modern workplace, which is a blend of in-office and remote work, and values employee mobility and workflow flexibility. Consequently, demand for Okta’s decentralized cloud security platform will soar over the next decade as enterprises globally modernize their security systems to accommodate growing remote work and mobility trends.
The Numbers: Okta reasonably projects as a 15%+ revenue grower over the next decade, with potential to turn its 80% gross margin profile into a 40%+ operating margin profile at scale. Assuming so, my modeling suggests Okta will net $12 in earnings per share by 2030. A 35-times forward earnings multiple on that implies a 2029 price target for OKTA stock of $420. A 10% discount rate implies a 2020 price target of approximately $180, while a 8.5% discount rate implies a 2020 price target of approximately $200, and a 7% discount rate gets you to $230. Adding it all up, OKTA stock is one of the best growth stocks to consider when it comes to security plays.
The Game Plan: Sell OKTA stock in 2020 on rallies above $230. Add exposure below $200. Buy the dip aggressively below $180.
The Trade Desk (TTD)
The Fundamentals: The Trade Desk has a created a powerful and robust demand-side platform for data-driven advertising, which enables brands and marketers to improve their ad campaigns by using data and automation technology to optimally and autonomously allocate ad spend into different channels based on different ad data inputs. This demand-side platform represents the future of advertising, since it’s miles more efficient that legacy human-driven, guess-and-check ad processes. It has also helped TTD stock become one of the most promising growth stocks to buy in recent years. Expect this growth to continue. Over the next several years, every brand and marketer in the world will embrace optimized data-driven advertising. As they do, The Trade Desk’s demand-side programmatic ad platform will go from relatively niche today, to globally mainstream.
The Numbers: The Trade Desk will leverage data-driven advertising tailwinds to increase its share of the global digital advertising market and drive steady 12%+ revenue growth over the next 10 years. Economies of scale will drive some positive operating leverage, and operating margins have potential to run from roughly 30% today to about 40% at scale. Earnings per share will likely come in around $25 by 2030. A 35-times forward earnings multiple on that implies a 2029 price target on TTD stock of $875. Using a 10% discount rate, that implies a 2020 price target of $370. An 8.5% discount rate implies a fair value of approximately $420. A 7% discount rate implies a fair value of $475.
The Game Plan: Fade rallies in TTD stock in 2020 above $475. Add exposure but don’t get too greedy in the lower $400 and upper $300 range. Start more aggressively buying the dip if shares fall below $370.
The Fundamentals: When it comes to growth stocks, TWLO stock isn’t the newest name on the block, but it is still worth a look. Twilio has created market-leading cloud communication APIs that essentially allow enterprises to communicate with both other enterprises and customers, all the time, from anywhere in the world, through any digital channel (text, video, voice, etc). Communication is fundamental to business operations. All enterprise functions — including communication — are migrating online. As they do, most enterprises are choosing Twilio to help power their cloud communications. This cloud communication megatrend will persist for the foreseeable future. As it does, Twilio’s growth trajectory will remain robust.
The Numbers: Twilio projects as a consistent 10%+ revenue grower over the next 10 years, with an opportunity to expand operating margins from the flat-line today to somewhere around 30% by 2030. My modeling suggests such assumptions pave the path for the cloud communications company to net about $12 in earnings per share by 2030. A 35-times forward earnings multiple on that implies a 2029 price target for TWLO stock of $420. A 10% discount rate on that equates to a 2020 price target of nearly $180, an 8.5% discount rate equates to $200 and a 7% discount rate equates to $230.
The Game Plan: If TWLO stock surges above $230 in 2020, fade the rally. Dips towards and below $200 can be seen as opportunities to dip your toes in. Dips towards the $175 and lower range should be seen as strong buying opportunities.
The Fundamentals: Shopping is broadly moving online. But before Covid-19, the e-commerce migration was disjointed. In certain verticals, like apparel, online shopping was quickly morphing into the standard. In other verticals, like automobiles, online shopping remained relatively niche. Covid-19 has changed that. Now, if you want to buy anything, you have to buy it online. Sure, this won’t be true forever. Physical stores will open back up. But, the pandemic has sparked more robust e-commerce adoption into under-penetrated verticals like autos. History tells us this robust e-commerce uptake won’t go back to the offline channel once things open back up. To that end, online auto sales appear on the cusp of a huge uptick over the next decade, and Carvana is well positioned to benefit from this uptick as America’s largest online used car retailer.
The Numbers: Carvana should consistently expand its share of the U.S. auto sales market over the next decade, driving steady double-digit revenue growth at the company. Operating margins should improve with scale, but remain relatively muted given the marketplace model, and ultimately pan out just below 10%. Profits have a pathway to $15 per share by 2030. A technology sector-average 20-times forward earnings multiple on that implies a 2029 price target of $300. Based on 7%, 8.5% and 10% discount rates, that implies 2020 price targets for CVNA stock of approximately $165, $145 and $125, respectively.
The Game Plan: If CVNA stock drops below $125, buy the dip. Otherwise, maintain equal-weight exposure up until $165, at which point you should start trimming exposure.
The Fundamentals: Adobe is the “visual” company. Because everything is becoming more “visual,” Adobe is positioned to see demand for its products and services soar over the next several years. This strength allows this long-standing company to remain one of the key growth stocks to pay attention to. On the consumer side, increased engagement on visual-first social media platforms and increased communication through visual-focused mediums has created and will continue to support rising demand for creative content creation and editing solutions (and Adobe offers best-in-breed solutions for that purpose). Meanwhile, because consumers are spending all their time in visual channels, enterprises are having to increasingly connect with their customers using visually compelling content, creating booming demand Adobe’s enterprise-grade, market-leading visual marketing tools. These visual megatrends will remain in place for the foreseeable, implying strong growth prospects for Adobe over the next several years.
The Numbers: Adobe should be able to leverage “visual” technology tailwinds to sustain mostly 10%+ revenue growth over the next several years. Gross margins should remain high around 90% on the back of strong demand. Economies of scale should drive positive operating leverage throughout the rest of the business. Earnings per share should roar to $27.50 by 2030. A 35-times forward earnings multiple on that implies a 2029 price target of $960. Discount rates of 7%, 8.5%, and 10% on that imply 2020 price targets of approximately $520, $460 and $410, respectively.
The Game Plan: On dips below $400 in 2020, ADBE stock is a compelling buy. Otherwise, throughout the $400 range, the stock is worth holding onto. Up in the lower $500 range, it’s time to start selling and trimming exposure.
The Fundamentals: Splunk is the big data company. The company’s core offering, the Data-to-Everything platform, is quite literally about turning data of any sort within a company, into actionable and valuable insights. Because we live in a world where data is everywhere — and because the volume of data globally will only explode higher over the next decade — Splunk’s ability to analyze all that data and glean value from it will become mission-critical for enterprises. To that end, Splunk’s Data-to-Everything platform could reach enterprise ubiquity within the decade, meaning this company will grow by leaps and bounds in the 2020s.
The Numbers: Splunk will turn big data demand tailwinds into steady 12%+ revenue growth over the next several years, which is big enough to allow economies of scale to drive significant positive operating leverage and push operating margins up to 30%+ at scale. Under those assumptions, my modeling suggests that Splunk will earn about $12.50 per share by 2030. A 35-times forward earnings multiple on that implies a 2029 price target for SPLK stock of roughly $437. Depending on the discount rate (7% to 10%), that implies a 2020 price target for SPLK stock anywhere between $185 and $240.
The Game Plan: If current weakness in SPLK stock persists and drags the stock below $180, buy the dip. Otherwise, wait on the sidelines.
The Fundamentals: Roku is turning into the cable box of streaming TV, by constructing a centralized, curated, content-agnostic platform that has attracted a huge audience by allowing all streamers to seamlessly access all streaming services. As the cable box of streaming TV, Roku is well positioned to earn the lion’s share of the $70 billion worth of U.S. advertising spend that is set to migrate from linear to streaming TV over the next decade. As that happens, Roku’s revenues and profits will soar higher.
The Numbers: For the most part over the next decade, Roku should sustain 15%+ revenue growth, powered mostly by the shift of advertising dollars from linear to streaming TV. The ad business has high gross margins, so big growth therein should allow economies of scale to drive positive operating leverage. Operating margins should rise to 25%+ at scale. Assuming so, my modeling suggests that Roku’s 2030 earnings per share will wind up around $15. A 23-times forward multiple on that implies a 2029 price target for ROKU stock of $35. Depending on the discount rate (7% to 10%), that implies a range of 2020 price targets between $145 and $190.
The Game Plan: Buy ROKU stock if broader market weakness drags the stock down below $145. Until then, simply maintain exposure. Unless shares take off towards $200. Then start selling.
The Fundamentals: Square is a pure-play on the cashless payments revolution, but while it might not be as diverse as some of the other growth stocks on this list, its promise simply too significant to ignore. On one side, the company provides easy-to-use, plug-and-play physical cashless payment processors to merchants and retailers of all shapes and sizes. On the other side, Square has created a digital payments ecosystem, dubbed Cash App, which allows consumers to send money, buy goods and services and invest in stocks and bitcoin, all through one app. Together, these physical cashless payment processors and the Cash App ecosystem give Square robust supply side and demand-side exposure to the cashless payments revolution. Square should be able to leverage this end-to-end exposure to power significant growth over the next 5 to 10 years as cash becomes a thing of the past.
The Numbers: Square will leverage cashless commerce tailwinds to deliver 10%+ revenue growth for the next decade. Higher integration of software-oriented services will push up margins. Earnings per share will ramp toward $10.50 by 2030. Based on a payments sector-average 25-times forward earnings multiple, that implies a 2029 price target for SQ stock of just over $260. Discount rates ranging from 7% to 10% imply a 2020 price target for SQ stock of anywhere between $110 and $140.
The Game Plan: Buy SQ stock if shares fall back below $100. Stay sidelined in the $100 to $140 range. Trim exposure above $140.
The Fundamentals: Atlassian is all about making teamwork easier for companies. Teamwork, despite being mission-critical in the enterprise, is very hard to do well because organizations and projects often have several moving parts spread across multiple departments. Atlassian provides software tools — such as Jira, Confluence and Trello — that aggregate, connect and coordinate all those moving parts, to help organizations work together in the best way possible. Demand for these offerings will soar globally over the next few years as organizations accelerate their digital transformations, more fully embrace hybrid remote work environments and lean heavier into seamless collaboration and agile project management as competitive advantages. As demand soars, Atlassian’s growth narrative will remain robust and it should maintain its position among the best growth stocks to consider watching now.
The Numbers: Atlassian will turn office virtualization tailwinds into steady strong demand for its teamwork-oriented enterprise software solutions over the next decade. Revenues will rise at a steady 12%+ pace during that stretch. The software business model will lend itself to tremendous scalability. Earnings per share will rise towards $10 by 2030. Based on a 35-times forward earnings multiple and a range of discount rates from 7% to 10%, that implies a 2020 price target for TEAM stock of anywhere between $150 and $190.
The Game Plan: Buy TEAM stock on dips below $150. Trim exposure on rallies above $190.
The Fundamentals: Thanks to rising consumer demand for environmentally and socially positive products — as well as sustained government commitment to reducing carbon emissions and continued technological advances improving car performance and driving down battery costs — electric vehicles represent the mass future of passenger car transportation. EVs are on the cusp of going from nearly 2.6% penetration today, to more than 30% by the end of the decade. In this surging market, Tesla has no parallel. The company has the best technology. The coolest brand. The most robust production and distribution capabilities. Tesla will inevitably leverage these enduring advantages to sustain global EV market leadership, and continue to grow alongside this booming market for the next several years.
The Numbers: Tesla will turn into the world’s most important automobile company within the next decade, and along the way, it will fuel 10%+ revenue growth. Assuming margins pan out as management expects in the long run, then Tesla is on track to do $120 in earnings per share by 2030. Based on a market-average 17-times forward earnings multiple and a range of discount rates from 7% to 10%, that implies a 2020 price target for TSLA stock of anywhere between $850 and $1,100.
The Game Plan: Trim TSLA stock now that it’s up around $1,500. Buy on dips closer to $1,000.
The Fundamentals: Because electric vehicles are the future of global passenger car transportation, everywhere, the world’s largest automotive market — China — projects to one day be the world’s largest EV market, too. In that market, the premium EV vertical will be quite big, because Chinese consumers tend to have a robust appetite for luxury physical goods. In that premium EV vertical, NIO is the homegrown leader, with strong branding, production and technological advantages over both domestic and foreign competitors. Consequently, NIO has visible runway to turn into the “Tesla of China” in the 2020s, implying huge growth potential for this small EV maker over the next several years.
The Numbers: NIO’s delivery volumes and revenues will grow at a double-digit pace over the next decade. Gross margins will scale towards 20%. The opex rate will fall back towards 10%. Earnings per share will wind up around $1.50 by 2030. Based on a 17-times forward earnings multiple and a range of discount rates from 7% to 10%, that implies a 2020 price target for NIO stock of anywhere between $11 and $14.
The Game Plan: Trim exposure to NIO stock above the $15 level. Remain largely balanced in the lower teens. Buy the dip if shares drop below $10.
The Fundamentals: Of course, Amazon is a long-term winner because the company is an e-commerce juggernaut at a time when e-commerce sales are soaring, and a cloud computing behemoth at a time when every company in the world is pivoting to the cloud. But Amazon also has a nascent and rapidly growing digital ad business with a ton of long-term potential. There’s the Twitch video game streaming service, which is levered to esports tailwinds. And the company’s recent plunge into self-driving, which could ultimately manifest itself into an Amazon-branded, autonomous logistics network. All in all, Amazon is a technology giant with its fingers in every next-gen, growth industry that matters. That has enabled this behemoth to continually stand out among other growth stocks over the past decade.
The Numbers: Amazon will turn its leadership position in multiple secular growth markets into strong revenue growth over the next 10 years. Profit margins will improve as higher-margin businesses (cloud, digital advertising, self-driving) scale. Earnings per share will grow towards $275. Based on a 25-times forward earnings multiple and a range of discount rates from 7% to 10%, that implies a 2020 price target for AMZN stock of anywhere between $2,900 and $3,750.
The Game Plan: In the lower $3,000 range, stick with AMZN stock. If shares drop below $2,900, buy the dip. If shares soar above $3,750, fade the rally.
The Fundamentals: As mentioned earlier, Covid-19 has served as a permanent acceleration of e-commerce adoption in certain under-penetrated verticals. One such under-penetrated vertical is furniture sales. Over the next several years, with Covid-19 acting as the catalyst, more consumers will migrate to buying furniture online. Wayfair is — almost without competition — the best place to buy affordable furniture online. To that end, Wayfair is essentially the Amazon of furniture retail, and the furniture retail vertical is set for huge growth over the next several years. That’s a winning combination that implies big growth prospects for Wayfair in the 2020s.
The Numbers: As global home furniture sales migrate online and Wayfair sustains leadership position in the furniture e-retail vertical, the company should drive 10%+ revenue growth over the next decade. Operating margins should improve with economies of scale, and pan out just north of 5%. Earnings per share should rise towards $25. Based on a 20-times forward earnings multiple and a range of discount rates from 7% to 10%, that implies a 2020 price target for W stock of anywhere between $210 and $270.
The Game Plan: Stick with W stock in the lower $200 range. Buy the dip if shares fall below $200. Fade the rally if shares rally above $270.
Advanced Micro Devices (AMD)
The Fundamentals: Advanced Micro Devices has long played second fiddle to Intel (NASDAQ:INTC) in the CPU world, and Nvidia (NASDAQ:NVDA) in the GPU world. But, thanks to a recent multi-year streak of superior innovation, Advanced Micro Devices has stolen significant CPU share from Intel and GPU share from Nvidia. The company is now a major player in both markets. That’s a big deal, since demand for next-gen CPUs and GPUs will soar over the next decade, thanks to the emergence of break-through technologies like 5G, edge computing, AR/VR, automation, AI and self-driving. By earning itself a seat at the table ahead of these major CPU/GPU demand catalysts, AMD is positioned for significant growth over the next several years.
The Numbers: Market share expansion in critical hyper-growth verticals such as 5G, self-driving and automation should drive strong, mid-single-digit or better revenue growth rates at AMD for the next 10 years, making it one of the top growth stocks to watch now. The company’s profitability profile should improve with higher end-market demand and scale. Earnings per share should power to $5.50 or better by 2030. Based on an 18-times forward earnings multiple and a range of discount rates from 7% to 10%, that implies a 2020 price target for AMD stock of anywhere between $42 and $54.
The Game Plan: Trim near-term exposure to AMD stock at levels above $55. Build back that exposure on dips below $50. Double down if shares happen to fall back to $40.
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, OKTA, TTD, TWLO, ADBE, SPLK, ROKU, SQ, NIO, and AMZN.