Growth stocks have provided the tailwind behind the bull run of the past several years. Therefore the prospects of investing in growth names in 2021 are likely to appeal to many investors.
However, proper due diligence would still be necessary before committing our hard-earned capital to a number of businesses that may look like growth names. Today’s article introduces seven growth stocks that I believe should be on investors’ radar as potential buys.
Market participants typically choose one of two strategies to generate profits — growth investing or value investing. Those who believe a given company’s future earnings will grow at levels higher than broader markets or the company’s peers would be growth investors. As growth stocks tend to be volatile, short-term traders need to proceed with caution.
As recent research by scholars at the University of Akron and Korea’s Gangneung-Wonju National University highlighted, “Growth investors … buy stocks with future growth potential which can lead to a significant increase in stock prices in the long run. Growth stocks are expected to be currently trading at prices higher than their intrinsic value because of the growth potential.”
On the other hand, a value stock typically trades at a lower price than the company’s performance and fundamental metrics indicate. Warren Buffett is possibly one of the most famous and successful value investors.
Wall Street offers a range of solid growth names. Investors will note that many of the names I will discuss today are listed on the Nasdaq stock exchange. Nasdaq securities represent a wide range of market sectors, including technology, finance, health care, utilities, as well as exchange-traded funds (ETFs).
With that information, here are the seven growth stocks to consider buying in 2021.
- Applied Materials (NASDAQ:AMAT)
- ARK Fintech Innovation ETF (NYSEARCA:ARKF)
- Facebook (NASDAQ:FB)
- Glu Mobile (NASDAQ:GLUU)
- Immersion Corporation (NASDAQ:IMMR)
- Spotify Technology (NYSE:SPOT)
- Upwork (NASDAQ:UPWK)
Growth Stocks: Applied Materials (AMAT)
Santa Clara, California-based Applied Materials is one of the most important semiconductor fabrication equipment suppliers, based on revenue. It also provides LCD fabrication equipment to the flat panel display industry and photovoltaic (PV) manufacturing systems to the solar industry.
In mid-November, Applied Materials released fourth-quarter results. Revenue was $4.69 billion, a 25% increase YoY. Net income was $1.13 billion, up 62% YoY. Diluted earnings per share (EPS) was $1.23 in Q4, representing a 64% YoY increase.
The group also generated $1.32 billion in cash from operations. The board returned $250 million to AMAT stock holders including $200 million in dividends and $50 million in share repurchases.
CEO Gary Dickerson commented, “Applied Materials closed fiscal 2020 with record quarterly performance as demand for our semiconductor systems and services remains very strong. Our future opportunities have never looked better and, as powerful technology trends take shape, we are uniquely positioned to accelerate our customers’ roadmaps and outperform our markets.”
Over the past 52 weeks, the shares were up about 55%. AMAT stock’s forward price-to-earnings and price-to-sales ratios stand at 17.92 and 4.63, respectively.
The semiconductor industry is cyclical and open to large booms leading to busts. However, spending on advanced semiconductors has constantly been increasing. I expect Applied Materials to benefit from this positive trend for many quarters to come. Potential investors could consider buying the dips, especially if the price goes toward $92.50 or even below.
ARK Fintech Innovation ETF (ARKF)
Our next discussion centers around an exchange-traded fund, namely the ARK Fintech Innovation ETF, an actively managed fund. The exponential rise of e-commerce not only in the U.S, but worldwide also means growth for the technology behind digital money and risk management.
ARKF stock, which typically has 35-55 holdings, provides exposure to a range of global businesses that are regarded as part of the financial technology (fintech) sphere. These firms may include mobile payment platforms, online banks, digital wallets, peer-to-peer lenders, as well as those that develop or use blockchain technology, which is behind many cryptocurrencies that are getting daily headlines.
The ETF started trading in February 2019, and net assets are over $670 million. The top 10 stocks currently comprise about 44% of the fund. Square (NYSE:SQ), Argentina-based MercadoLibre (NASDAQ:MELI), Zillow (NASDAQ:Z) (NASDAQ:ZG), China-headquartered Tencent (OTC:TCEHY), Intercontinental Exchange (NYSE:ICE) and Pinterest (NYSE:PINS) lead the names in the roster.
In the past year, ARKF has doubled in value. A new earnings season is upon us. Therefore, many of the names in the fund could be volatile with a downward bias. A potential decline toward $47.50 would improve the margin of safety for buy-and-hold investors. I expect the move-away-from-cash trend to continue well into the new decade.
Facebook (FB)
As the dominant force in social media, the Menlo Park, California-headquartered Facebook needs little introduction. In addition to the widely used namesake social media platform, the group owns Instagram, Messenger, WhatsApp and Oculus. It has close to 3 billion monthly active users (MAUs) on Facebook. As a result, its reach is immense, and the group has significant ad-pricing power.
According to Q3 results released in late October, revenue was $21.47 billion, an increase of 22% YoY. GAAP net income of $7.85 billion translated into $2.71 per diluted share. A year ago, the comparable metrics had been $6.09 billion and $2.12, respectively. Free cash flow was $5.95 billion, compared to $5.63 billion in the third quarter of the previous year. Cash and equivalents came at $55.62.
CEO Mark Zuckerberg told analysts, “We had a strong quarter as people and businesses continue to rely on our services to stay connected and create economic opportunity during these tough times.”
CFO Dave Wehner added, “We expect our fourth quarter 2020 year-over-year ad revenue growth rate to be higher than our reported third quarter 2020 rate, driven by continued strong advertiser demand during the holiday season. Additionally, Oculus Quest 2 orders have been strong which should benefit Other Revenue.”
In the past year, FB stock increased by 20%. As a result, its market capitalization is close to $750 billion. FB stock’s forward P/E and P/S ratios stand at 25.13 and 9.97, respectively.
Facebook shares have been volatile in recent days as the indefinite ban of President Trump has been controversial. As well, concern over changes to WhatsApp’s terms and conditions vis-a-vis sharing data with the Facebook app have sent millions of users to other messaging apps. Some investors have decided to hit the “sell” button.
Any further potential profit-taking during the quarterly reporting season could offer a better entry point for long-term investors in FB stock.
Glu Mobile (GLUU)
From a mega-cap stock like Facebook, we move onto a small-cap stock, namely Glu Mobile. The San Francisco, California-headquartered group develops mobile games for users of smartphones and tablet devices. Some of its popular game titles include “Kim Kardashian: Hollywood,” “Design Home,” “Diner Dash,” “Covet Fashion,” and “Tap Sports Baseball.
The video gaming market is growing fast as “Technological proliferation and innovation in both hardware and software are expected to be the key factors driving the growth. The growing penetration of internet services coupled with the easy availability and access of games on the internet across the globe is also expected to keep the market growth prospects upbeat in the forthcoming years.” The sector is expected to be worth over $200 billion in 2023.
In early November, Glu Mobile announced Q3 results. Revenue was a record $158.5 million, up 48% YoY. Net income came at $13.4 million, or 8 cents per share. A year ago, the company had lost $5.1 million, or 3 cents per share. Free cash flow was $31.5 million. Cash and equivalents totaled $318.1 million.
CEO Nick Earl cited, “We followed up a very strong second quarter with a better-than-expected third quarter that saw year-over-year bookings growth of 22% led by the continued strong performance of our Growth Games … We anticipate a very strong finish to the year driven by our core brands, Crowdstar and Glu Sports, as well as our growth initiatives.”
In the past 52 weeks, GLUU stock appreciated about 55%. Forward P/E and P/S ratios stand at 16.16 and 2.95, respectively. Potential investors could consider buying into the declines. Meanwhile, Glu Mobile could also become a takeover candidate.
Immersion Corporation (IMMR)
Our next choice for today is another small-cap company. San Francisco, California-headquartered Immersion Corporation develops and licenses haptic technologies through which people use their sense of touch to operate digital devices. Its software and intellectual property (IP) focuses on different segments, such as mobile devices, wearables, mobile entertainment, automotive, and medical.
Research led by Mauricio Orozco of the University of Ottawa, Canada, highlighted, “A haptic interface is a device that allows a user to interact with a computer by receiving tactile and force feedback.” “Haptic research related to home entertainment and computer games has blossomed and impacted the development of technology during the past few years.”
In fact, Sony (NYSE:SNE) has a royalty agreement with Immersion and uses its haptic technology in the Playstation 5 console. Analysts now wonder if Microsoft (NASDAQ:MSFT) could be next.
The third-quarter results of early November showed revenue of $7.6 million compared to $10.6 million a year ago. On the other hand, non-GAAP operating expenses of $3.6 million declined 65% from non-GAAP operating expenses of $10.2 million in Q3 2019. As a result, non-GAAP net income was $4.1 million, or 15 cents per diluted share. A year ago, the numbers had been non-GAAP net income of $200,000, or 1 cent per diluted share. Cash and equivalents increased to $55.9 million.
Interim CEO Jared Smith commented, “I’m very excited for the opportunity to lead Immersion as we continue to expand the use of haptics into markets where we see the most compelling opportunities – mobile, gaming and automotive. This quarter, we reached a key milestone of achieving profitability on both a GAAP and a non-GAAP basis and achieved positive cash flow. We’re already seeing signs of recovery from COVID across our markets and are excited about the imminent launch of the PlayStation 5, which is garnering positive reviews for the haptic capabilities of its DualSense controller.”
In the past year, IMMR stock increased by 55%. P/B and P/S ratios stand at 6.0 and 10.38, respectively. The company serves a niche market that deserves investors’ attention. Like GLUU stock, it could well be a takeover candidate.
Spotify Technology (SPOT)
Sweden’s Spotify Technology, which offers digital music-streaming services, has in recent years become a popular name among music lovers. In the early weeks of Covid-19, Spotify’s digital advertising business took a hit as customers cut back on their budgets.
According to Q3 results announced in October, the revenue of EUR 1.98 billion euros ($2.4 billion) meant a growth of 14% YoY. Total monthly active users (MAUs) went up by 29% Y0Y and reached 320 million in the quarter.
Investors were pleased to see premium revenue grew 15% YoY to EUR 1.79 billion while ad-supported revenue increased 9% YoY. Net loss was EUR 101 million compared to a net income of EUR 241 million a year ago. Free cash flow came to EUR 103 million, up almost double from the comparable year-ago period.
CEO Daniel Ek said, “Monthly active users beat the top end of our guidance. Subscribers hit the very top of our range. And our service now reaches 320 million users and 144 million subscribers. The size of our total catalog increased significantly, and our advertising business returned to growth. We also beat expectations in our newest markets where we are seeing growth continue to accelerate.”
Over the past 52 weeks, the SPOT stock price increased 120%. P/B and P/S ratios stand at 21.64 and 6.31, respectively. Those investors who believe advertising spending by Spotify’s customers is likely to rise as the world returns to post-pandemic normality could consider buying the pullbacks.
Upwork (UPWK)
Santa Clara, California-based Upwork operates a freelancing platform connecting individuals with businesses. 2020 saw the work-from-home trend boom significantly. The new decade will possibly witness more upside for freelancing projects and the gig economy.
Q3 metrics released in early November showed revenue of $96.7 million, up 24%. Investors were pleased to see the gross margin increase by two percentage points YoY to 73% in Q3.
Non-GAAP net income came at $5.0 million, or 4 cents per share, compared to the respective figures of $1.1 million, or 1 cent per share, in the third quarter of 2019.
CEO Hayden Brown cited, “As the world’s largest work marketplace that connects businesses with independent talent, as measured by gross services volume, we have been building capabilities and tools for a world now increasingly ready to use them.”
Over the past year, UPWK stock is up about 270%. P/B and P/S ratios are 16.48 and 12.09, respectively, making the current valuation frothy. A potential decline toward $35 or even below would improve the margin of safety.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
