This year is shaping up to be one of the best years ever for growth stocks. The fiscal fears of the pandemic, which hurt markets in March, are pretty much a distant memory now.
Why? For one, the Federal Reserve’s commitment to sustain market liquidity did more than it should have for the markets. Once this is all over, value investors will have broken even at best. Meanwhile, growth stocks are poised to keep rising, so long as certain trends continue.
For instance, many of the stocks on this list would benefit from the work-from-home model staying intact. Additionally, as healthcare authorities approve the distribution of a Covid-19 vaccine, cloud software stocks will keep growing. And even after the pandemic, the momentum of electronic transactions, pockets of strength in the Chinese retail market and the need for Software as a Service (SaaS) will lift the following picks.
So, here are seven growth stocks that could make you rich as they ride the trends:
- Square (NYSE:SQ)
- JD.com (NASDAQ:JD)
- Palantir Technologies (NYSE:PLTR)
- Elastic (NYSE:ESTC)
- Datadog (NASDAQ:DDOG)
- StoneCo (NASDAQ:STNE)
- FedEx (NYSE:FDX)
First on my list of growth stocks is SQ stock. In the electronic transaction space, Square’s moat continues to widen. Plus, its usage will continue to grow as it adds more services to the platform.
On Nov. 25, Square said it would buy Credit Karma Tax for $50 million to grow its Cash App business. This adds a “free, do-it-yourself tax filing service for consumers.” Given its strong platform and stickiness, the small cost of the deal will likely create billions in future revenue for the company
On top of this announcement, the seasonality chart below also suggests that Square stock is set to rise for the first nine months of 2021:
Growth investors may ignore metrics like price-to-earnings and price-to-sales. What’s clear from Square’s recent quarters, though, is that small product enhancements lead to strong revenue growth.
And if that wasn’t enough, Square will also benefit from the pandemic-driven momentum. For instance, it helped users directly deposit stimulus payments. If the government approves another stimulus, Square will benefit from even more usage.
In the Chinese market, JD is a winning e-commerce retailer. For instance, it’s JD Health business raised $3.5 billion in a Hong Kong initial public offering (IPO). The listing will give the company plenty of capital for investing back into the business.
Plus, another part of JD.com — JD Logistics — could raise another $3 billion in the first half of 2021 from its public listing.
In the third quarter of 2020, the company reaffirmed its spot as one of the top e-commerce retailers in China. From 2012 to now, its compounded annual growth rate (CAGR) hit 32%. JD’s gross profits also continue to steadily rise. For example, it reached 14.6% in 2019 versus 12.2% in 2015. Economies of scale are increasing its business efficiency and as the company improves its logistics, it will be able to scale even further.
On top of that, JD has the highest growth score compared to American retailers.
According to Simply Wall St, the stock’s fair value is currently on par with its price at $82.25. However, if the company continues to post increasing growth rates, the site will revise its price target higher. That’s certainly a distinct possibility with this pick of the growth stocks.
Palantir Technologies (PLTR)
After a successful IPO, Palantir’s stock price has tripled from the $9 range to over $27. So, this software firm’s growth could definitely make investors rich. But what are some signs of that? Well, on Nov. 18, the company announced a contract with the U.S. Army.
Doug Philippone, Palantir’s Global Defense lead, said about the deal, “The Army’s proactive approach in seeking out opportunities to deploy commercially-available solutions has been instrumental in getting critical capabilities into the hands of warfighters faster.”
Despite this important development for PLTR, though, Wall Street analysts are not completely sold on the company’s upside as one of the growth stocks. According to Tipranks, the average price target is currently $13.83 and most analysts rate it as a hold. However, in my opinion, the pros fail to recognize Palantir’s ability to win big, growth-spurring contracts.
Elastic’s strong revenue growth and increased full-year forecast reaffirm the software company’s strength, making it a solid pick for investors considering growth stocks.
In its most recent quarter, ESTC stock rallied on Dec. 2 after posting revenue growth of 43% year-over-year (YOY) to $144.9 million. Within that, SaaS revenue rose 81% YOY to $37.4 million. Plus, Elastic ended the quarter with $349 million in cash and cash equivalents. CEO Shay Banon noted, “We are innovating across our three solutions built on a single stack, expanding our relationships with key partners, and empowering our customers to drive outcomes through data, insights, and action.”
On top of those numbers, the company also achieved total subscriptions of 12,900 for the quarter and 650 of its annual contracts were worth over $100,000. Most importantly, though, subscription revenue made up 93% of the total revenue. That recurring income is predictable and suggests the company will only keep expanding.
Expert readers on Finbox model a 5-year discounted cash flow model, assuming a discount rate of 9% as seen below.
|Discount Rate||9.5% – 8.5%||9.00%|
|Terminal Revenue Multiple||18.2x – 19.2x||18.7x|
|Fair Value||$193.85 – $212.36||$202.95|
The fair value from this model is over $200 a share.
On Nov. 10, Datadog posted Q3 sales that rose 61% YOY to about $155 million. DDOG stock initially fell that day, but the eight new products and features it announced at the annual Dash conference suggest strong software growth ahead.
CEO Olivier Pomel said, “[W]e have maintained our strong track record of innovation and extended our leadership as the most complete and cloud native end-to-end observability platform”
So, DDOG stock has tremendous upside moving forward. For example, it just signed a deal with Microsoft’s (NASDAQ:MSFT) Azure and extended its partnership with Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Cloud.
On Nov. 17, the company also announced a monitoring cloud infrastructure deal with Oracle (NYSE:OCL). The arrangement will allow customers to move data logs from Oracle Cloud Infrastructure (OCI) to Datadog and run analytics. Having the ability to consolidate those logs will be a major convenience, as well as an incentive for users to add the firm’s service offering.
|Discount Rate||9.5% – 8.5%||9.00%|
|Terminal Revenue Multiple||23.7x – 24.7x||24.2x|
|Fair Value||$108.19 – $116.71||$112.39|
In the above 5-year DCF Revenue exit model from Finbox, this pick of the growth stocks has a fair value of at least $112.
Next on my list of growth stocks is StoneCo. Despite having not announcing quarterly results since Oct. 30, the stock continues to rise nicely.
In Q3 of 2020, the company posted its highest historical figures on total payment volume (TPV), total revenue, adjusted net income and more. As a fintech platform, investors are rushing to buy STNE stock before it rises even further.
Additionally, the company’s revenue retention of above 100% with digital small and medium business clients shows how sticky its platform is. StoneCo will become a full commerce platform after enhancing its product with the Linx acquisition.
|Surprise Type||Announce Date||Period End Date||Actual||Est.||Surprise (%)|
As shown in the Stock Rover chart above, the company’s results are at odds with Wall Street consensus estimates. Though it is unlikely, an earnings miss might create a better entry price.
Last on my list of growth stocks is FedEx. When it comes to the integrated freight and logistics sector, this company often gets overlooked. However, after UPS (NYSE:UPS) placed shipping limits on some retailers, the reduced supply of shipping options will help FedEx’s profit margins. Plus, FDX stock also pays a token dividend. That signals the firm’s confidence in its cash flow.
So, when the company reports quarterly results this month, expect revenue and earnings per share (EPS) to top expectations again. This will repeat its Q1 strength, when operating margin rose to 8.5%. At the time, FedEx warned investors of continued uncertainties ahead. Still, it expected to benefit from its strong position in the U.S. market. International package and freight markets will also lift its quarterly results.
On its September conference call, COO Raj Subramaniam said, “[T]he e-commerce market is large and it’s growing. And the growth has accelerated as pull forward by three years.” FedEx is a central player in this growth phenomenon, especially in the domestic market. So, to capitalize on the trend, investors may hold FDX instead of expensive online retailers. The firm manages its capital conservatively and delivers on steady revenue growth.
On Tipranks, the average price target on FDX stock is over $319. When the company raises its guidance again, expect analysts to lift their fair value forecast, too.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.