Growth stocks have dominated the market over the last few years. That’s the good news for investors in the category. The bad news is that the gains leave very real concerns in terms of valuation.
After all, this is now a market where multiples to revenue over 20x are common — and in some cases even look cheap. Zoom Video Communications (NASDAQ:ZM), for instance, has a market capitalization over $80 billion and trades at a stunning 95x trailing 12-month sales.
Generally speaking, we haven’t seen multiples reach these levels since the dot-com bubble of the late 1990s. And we all know how that turned out.
Still, it’s probably too simplistic to argue that these gains are due entirely to another bubble. The technological changes underpinning the market are real. Many of those changes are being accelerated by the novel coronavirus. Valuations admittedly are a question mark, but there are plenty of reasons for optimism.
And even after staggering rallies in so many growth stocks, there are some that still can provide impressive returns going forward. In fact, those returns could clear 100%.
Such returns might require more patience than the impressive gains in tech from March lows, but for investors with a mid- to long-term timeframe, these are 10 growth stocks that can double:
- Fastly (NYSE:FSLY)
- Virgin Galactic (NYSE:SPCE)
- InMode (NASDAQ:INMD)
- The RealReal (NASDAQ:REAL)
- Progyny (NASDAQ:PGNY)
- Roku (NASDAQ:ROKU)
- Aphria (NASDAQ:APHA)
- CrowdStrike (NASDAQ:CRWD)
- Slack (NYSE:WORK)
- Pinterest (NYSE:PINS)
Growth Stocks: Fastly (FSLY)
There aren’t a lot of “buy the dip” growth stocks out there at the moment, but Fastly stock is one of them. FSLY stock fell 35% in five sessions into, but mostly out of, second-quarter earnings earlier this month.
To be sure, the declines came after a parabolic rally into the release. FSLY stock is basically back where it started. But that might be good enough.
After all, Fastly has significant growth potential ahead. Its content delivery network competes with the likes of Akamai Technologies (NASDAQ:AKAM), Cloudflare (NYSE:NET), and Limelight Networks (NASDAQ:LLNW). And the latter two names perhaps merit honorable mention for this list.
CDNs are going to be big business. Streaming media and videoconferencing will drive additional need for bandwidth. And Fastly is a leader in so-called “edge computing,” which improves latency (response time) and quality. For gaming and in-game sports betting, for instance, edge computing increasingly is a must.
As with most growth stocks, FSLY isn’t cheap, at a whopping 35x trailing 12-month revenue. Shares have more than quadrupled over the last year, even with the pullback. However, it does have steep reliance on TikTok, which is under significant pressure from President Donald Trump. As a result, some investors might be expecting, or at least hoping for, more downside ahead.
But as we’ve seen across the market over the last few years, strong past performance usually leads to more gains, rather than a pullback. Fastly’s recent pullback obviously is an exception to that trend. There’s a massive market opportunity here, and a market capitalization back under $9 billion suggests a path to significant upside if Fastly can prove the winner in edge. That’s still a big if, admittedly, but there are big potential rewards here, too.
Virgin Galactic (SPCE)
It’s worth emphasizing up front: Virgin Galactic stock can go to zero. It can get there in a hurry, too. This is a company trying to privatize manned spaceflight. It’s competing against deep-pocketed rivals like Boeing (NYSE:BA), SpaceX and Blue Origin. All it takes is one unfortunate accident for investor capital to flood elsewhere, and at that point, the SPCE story likely comes to a quick end.
But the potential rewards are enormous. It’s not just manned spaceflight, either. There are hopes that Virgin’s efforts will lead to renewed hypersonic travel as well. With a growing cadre of millionaires worldwide, the estimated $250,000 price tag will be more affordable than some might think. And that price, assuming success, will come down over time.
It’s certainly not impossible that Virgin Galactic’s current market capitalization near $5 billion — pro forma for a recent secondary offering — rises by many multiples in the coming decades. And in the meantime, optimism toward Virgin’s competitive positioning or development timeline could send SPCE higher. After all, institutional investors paid $19.50 a share in that offering, and SPCE already is below $18.
But it bears repeating: SPCE stock can go to zero. This is not a stock to buy with money an investor can’t afford to lose.
Growth Stocks: InMode (INMD)
It’s a fair question as to whether INMD stock should be considered in a discussion of growth stocks. After all, INMD trades at 30x forward earnings. Revenue actually declined 21% year-over-year in the second quarter.
But the manufacturer of energy-based aesthetics equipment saw Q2 sales plunge due solely to the coronavirus pandemic. This, after all, is a company that grew revenue 87% in 2018 and another 56% last year. Growth is likely to resume once doctor’s offices (InMode’s core customer base) reopen and normalcy returns.
So whether INMD is a growth stock or a GARP (growth at a reasonable price) stock perhaps isn’t all that important. What is important is that there is a clear path to big gains. A 30x multiple — reasonable in the context of top-line increases — and a couple of more years of growth suggest InMode stock could head toward $100 from a current $32.
To get there, InMode needs to prove that its technology can keep driving growth in a fiercely competitive space that includes ZELTIQ, a unit of AbbVie (NYSE:ABBV), and Cutera (NASDAQ:CUTR), among many others. If it can do so, a sharp rally off March lows will continue.
The RealReal (REAL)
Pretty much every e-commerce name has rallied in 2020 — and rallied sharply — except for The RealReal. REAL stock, even with a sharp recovery from March lows, is down almost 7% year-to-date.
The company has faced significant pandemic-related headwinds. Appointments to authenticate used goods sold on the platform obviously were interrupted. Gross merchandise volume (the amount of product sold on the platform) declined 20% in the second quarter.
But there is still an intriguing long-term case here. Millennials like used goods both for their unique qualities and their environmental benefits. Neither a $1.5 billion market capitalization nor a roughly 5x revenue multiple look onerous by the standards of the sector. And trends improved through Q2, and should improve further in the second half.
Indeed, I liked REAL stock heading into the year, arguing that it was a 2019 loser that would become a 2020 winner. I still think that will be the case. And if The RealReal can get back to growth, renewed investor confidence could merit a high-single-digit revenue multiple, leading to a clean double from current levels.
Growth Stocks: Progyny (PGNY)
The best growth stocks in recent years have been those that can benefit from secular, long-term trends. Progyny stock qualifies.
The company is a fertility benefits management provider, with a complete solution for both businesses and patients. Given ever-later births in the United States, demand is likely to rise for years to come. It’s even possible that the pandemic, which has interrupted the normalcy of the dating world, can provide a modest boost to that demand as relationships start later.
PGNY stock is expensive, but by the standards of the category, valuation is hardly stretched. The stock trades at 76x next year’s earnings and a little over 8x this year’s revenue guidance. Given that Progyny’s outlook suggests 41%-48% growth this year, it’s not hard to see how modest multiple expansion and continued growth can lead to 100%-plus returns in a few years, if not sooner.
From here, ROKU stock looks like it should either double or drop by half. It roughly seems like the market agrees. ROKU hasn’t regained highs reached early in September of last year. At least by the standards of growth stocks, investors are taking a wait-and-see approach.
The case for ROKU is relatively obvious. It’s a play on streaming video demand, which continues to rise. Margins should improve over time as the company transitions to being a software play (and a provider of its own through the Roku channel) and away from its loss-making hardware business.
The case against the stock, however, is similarly easy to make. Direct competitors include Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), two of the best tech companies in the world. Comcast (NASDAQ:CMCSA) is licensing its X1 platform to other cable companies, and could look to encroach on Roku’s turf as well.
So far, Roku’s lead in market share has remained unchallenged. If that continues, ROKU stock should have a breakout ahead. An interesting test might come from contentious talks at the moment with Comcast and AT&T (NYSE:T) for the carriage of their streaming services.
If Roku can make those giants blink, that would seem a clear sign of the company’s strength. And that might be enough to catalyze a long-awaited rally that sends ROKU to new highs and beyond.
Growth Stocks: Aphria (APHA)
I believe there is going to be a Canadian cannabis company that doubles from current levels. The sector has been hammered since the beginning of last year, thanks to an ugly combination of too much supply and too little demand. But there will be a shakeout as firms go bankrupt or pull back on production, and that should lead to more balance in the Canadian market. International sales, meanwhile, should rise over time, with Israel the newest battleground.
The question is which stock will be the winner. I’m intrigued by Cronos (NASDAQ:CRON), a stock in which I’ve sold put options. But Cronos’ patient strategy hardly puts it in the category of growth stocks.
Aphria, on the other hand, grew revenue 18% year-over-year in its fiscal fourth quarter, with adult-use cannabis sales quadrupling for the year. And it’s driving that growth with positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), while the likes of Aurora Cannabis (NYSE:ACB) and Hexo (NYSE:HEXO) are slashing costs to get to the same place.
To some extent, investors have figured out the story, as APHA has outperformed the sector so far this year. But the stock still is down 14% so far in 2020, and trades at reasonable multiples relative to EBITDA and revenue. All APHA needs is for investors to have some confidence in the sector’s best stocks. The resulting combination of multiple expansion and growth could be enough to get the stock back to the double-digit range at which it traded as recently as 16 months ago.
CrowdStrike stock is far and away the most expensive of the growth stocks on this list. CRWD trades at more than 40x trailing 12-month revenue. Shares have more than tripled from March lows, and more than doubled so far this year. There is certainly a sense, and maybe a strong case, that the easy money has been made.
But there are few better stories in the market — and those better stories are getting even higher valuations. Cybersecurity demand is only going to rise thanks to increased internet usage, and work-from-home setups driven by the pandemic will accelerate that demand.
Meanwhile, unlike many rivals, CrowdStrike offers a purely cloud-native platform. That should be a huge competitive edge.
To some extent, these positives are priced in. CRWD stock has a market capitalization of $24 billion, not far from Palo Alto Networks’ (NYSE:PANW) $26 billion. But if CrowdStrike proves to be the clear winner in cybersecurity, its stock should merit a sizeable premium. That in turn could lead the market value to clear $30 billion, $40 billion and then $50 billion over time — leading CRWD to double.
Growth Stocks: Slack (WORK)
Amid roaring trade in enterprise cloud plays, WORK stock has been left behind. To be sure, shares have gained 30% so far this year. But they are about flat compared to February highs.
Meanwhile, here too does working from home seem a potential tailwind. A 23x revenue valuation is hardly cheap, but a notable discount to other plays in the category. Earnings two weeks out could provide a catalyst.
To double, Slack would need a market capitalization around $35 billion. That’s a big number — but not that big in the context of Zoom, let alone the likes of Splunk (NASDAQ:SPLK), Okta (NASDAQ:OKTA) or Twilio (NYSE:TWLO). It seems a number Slack can get to, if it’s next in line of enterprise software-as-a-service stocks to soar.
On its face, that perhaps seems like a silly question. Snap and Twitter (the latter in particular given the current state of U.S. politics) seem far larger and impactful.
But Pinterest’s user numbers are keeping pace, a key reason why I recommended PINS stock after a steep pullback in February. And the nature of the platform lends itself better to advertising sales, where both Snap and Twitter have struggled on occasion.
Both SNAP and TWTR may climb from here. In fact, it is likely they will. If Pinterest stock can rise faster and catch those rivals, however, it has a real chance to double even after a strong rally of late.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He is short put options in Cronos stock, and has no positions in any other securities mentioned.