Many investors enjoy a good dividend and low valuation. But here’s the truth: without growth stocks, investors are missing out on some excellent opportunities.
Admittedly, growth stocks can come with high valuations and increased volatility. However, they aren’t all like that. Many have the best margins in the market and balance sheets that appear impenetrable.
These are some of the most valuable companies on earth for a reason — and not because we’re in a bubble. Instead, it’s because they have superior brands (moats), robust growth and fat profit margins.
If these stocks aren’t for certain investors, that’s fine. But understand that they help drive the overall indices higher, too. Although growth names can have higher volatility from time to time, long-term holders can see massive returns. Sometimes, those returns are life-changing.
So, let’s look at a few top growth stocks that investors should keep their eye on:
- Pinterest (NYSE:PINS)
- Salesforce (NYSE:CRM)
- Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG)
- Farfetch (NYSE:FTCH)
- Alibaba (NYSE:BABA)
- Nvidia (NASDAQ:NVDA)
- Invitae (NYSE:NVTA)
Growth Stocks to Buy: Pinterest (PINS)
Pinterest is one of the best growth stocks I’m aware of right now. It has robust revenue momentum, it’s profitable and it has a great balance sheet. Best of all? Wall Street still seems skeptical.
In mid-February, the company turned in an impressive fourth-quarter earnings report as top- and bottom-line results blew past estimates. Guidance for the next quarter came in well ahead of expectations, too.
Simply put, analysts have been far too conservative and it shows. Wall Street has practically blown off the company’s lights-out quarter, although they were willing to gobble up the stock on reports that Microsoft (NASDAQ:MSFT) was interested in acquiring the name a few months ago.
Even though those talks are reportedly not ongoing, perhaps that gives investors faith that there could be a bid in the stock price in the event of a deeper correction.
Obviously, anything can happen in the market — such as a quick 25% pullback, for instance — but PINS stock seems like it has significant upside in the future. Particularly with the valuations that Twitter (NYSE:TWTR) and Snap (NYSE:SNAP) are garnering despite their inferior businesses.
One reason I really like Salesforce as one of the growth stocks to buy on this list? Simply that it hasn’t been participating in the rally.
Sure, we all love seeing relative strength in our holdings and we enjoy stocks making record highs. But let’s face it: it can be hard to pull the trigger on some names as they continue to crank out new high after new high.
Thankfully, though, there are some high-quality holdings that aren’t doing that on a daily basis. Salesforce is one of them.
CRM stock just hit a multi-month high, yet it remains about 15% below its all-time highs. The stock commands a market capitalization of “just” $227 billion. While large, it’s possible that Salesforce will become one of tech’s future titans — like FAANG.
With strong revenue-growth forecasts for the next few years, I expect CRM to continue churning out free cash flow and making savvy acquisitions like Slack (NYSE:WORK). Further, investments like those made in Snowflake (NYSE:SNOW) and Zoom (NASDAQ:ZM) should continue to pay dividends.
Alphabet (GOOGL, GOOG)
Speaking of FAANG, let’s look at that group’s best performing component in 2021 and over the last six months.
When it comes to growth stocks, Alphabet has been in a league of its own. While mega-cap tech stocks continue to consolidate, shares in GOOG stock continue to rocket higher.
The company commands a $1.4 trillion market cap and the stock is up 36% over the last six months. However, that doesn’t mean it’s done going higher. Of course, Alphabet stock will eventually need to rest, but right now it’s firing on all cylinders.
For instance, the company’s recent Q4 earnings report was robust. Diluted earnings per share (EPS) of $22.30 came in about 40% ahead of consensus expectations, while revenue of $56.9 billion grew 23.5% year-over-year (YOY) and beat estimates by about $4 billion.
On top of that, analysts expect solid growth over the next several years as well.
Alphabet stock will go through its consolidation phase eventually, but this one is ultimately a long-term winner. It owns the two most popular websites in the world — Google and YouTube — and it has solid, steady growth.
Lastly, its balance sheet is robust. The company’s total cash, cash equivalents and marketable securities sit at more than $136 billion while its long-term debt rests at just $13.9 billion.
While Farfetch has done a great job of holding its recent gains, this pick seems undervalued by Wall Street. Couple that with its strong growth and FTCH stock is a perfect candidate when it comes to growth stocks to build around.
Farfetch is the premiere marketplace for luxury goods. And despite the economic impact of the novel coronavirus, it still has strong growth. More specifically, the company has trailing 12-month revenue growth of more than 80%. Going forward, analysts expect 36.6% growth in 2021 and 28.7% growth in 2022.
Despite this robust growth though, FTCH stock’s valuation remains relatively low. Shares trade at just 14.3 times forward price-sales. For a tech stock and online marketplace churning out these kinds of growth numbers, I’m surprised it’s not being valued more highly.
Plus, throw in China via Farfetch’s partnership with Alibaba and we have a recipe for even larger growth.
Speaking of Alibaba, I would be remiss if I left out China’s crown jewel of e-commerce from this list of growth stocks. In fact, scratch that — Alibaba is a crown jewel outside of China, too.
The company has taken a strategy similar to Amazon (NASDAQ:AMZN). After building out a successful e-commerce arm, BABA began to expand. It continues to rack up assets (either via investments or created on its own) and it’s become a juggernaut in one of the world’s largest, fastest-growing economies.
China’s economy is second only to the United States, but with the way it’s growing and with its population — which is over four times the size of the U.S. — it’s only a matter of time before it becomes the largest.
Alibaba serves that population through its Amazon-like website. But the company also owns the other two most popular e-commerce sites in China: Taobao and Tmall.
Additionally, BABA has its own cloud business, as well as logistics and digital entertainment units. Plus, thile its investment in Ant Group didn’t go quite as planned thanks to a nixed initial public offering (IPO), it’s not something to write off either.
Ant was primed to make a record IPO before regulators stirred up some drama. But that negative short-term catalyst has a bright side: it created a nice buying opportunity in BABA stock.
I have been a big-time bull on Nvidia for one simple reason: this pick of the growth stocks is a building block for numerous growth themes of the future.
Nvidia doesn’t just make one or two commoditized components for industries seeing cyclical growth. It’s making crucial components for multiple industries that have long-term secular growth.
The company’s graphics processing unites (GPUs) are significantly better than its competitors’ units. Further, Nvidia caters to data centers and the cloud, autonomous and electric vehicles (EVs), gaming, graphics and high-powered computers.
None of these industries are going to disappear in the near future — they will simply continue to grow.
When NVDA stock corrected in Q1 2020, it only dipped to its 200-day moving average before erupting to new highs. While it’s been consolidating for months now, shares just hit new all-time highs, reaching $614.90 on Feb. 16. And you can look for the company to continue chugging higher, especially if it lands its prized acquisition of Arm. All in all, Nvidia’s numbers won’t quit. Covid-19 accelerated demand in 2020 and NVDA continues to sport impressive growth estimates moving forward.
Plus, the fact that it’s very profitable and free cash flow positive will cement it as a pillar of the tech sector for years — and likely decades — to come.
Last on my list of growth stocks is Invitae, easily the most speculative name on here. I have written about Invitae sparingly over the last two years.
NVTA has such a promising business model in a budding industry, but its execution hasn’t been as reliable. That’s made it a hard investment to stomach. It’s volatility can be rampant at times.
The company’s biggest issue isn’t growth — in fact, there is so much opportunity for growth here that it’s insane. The genomics space is ripe with potential, as technology is finally allowing us to leverage the strength of artificial intelligence (AI) and machine learning to improve our health.
That’s exactly what Invitae is doing, using its technology to churn out results that otherwise wouldn’t be possible. The company’s work is incredible and it’s one reason why analysts expect almost 42% revenue growth next year.
If it delivers in-line results, Invitae could generate some $700 million in sales in 2022. So, like I said, growth isn’t the problem.
What is? Cash burn.
Put simply, the company does not generate a profit and it does not operate with positive cash flow. That’s not a deal-breaker necessarily, but at some point investors need to stop being diluted and the company needs to stop raising cash.
If Invitae can tighten up its cash burn and work its bottom line in the right direction, NVTA stock has the potential to be a huge winner in an emerging industry.
On the date of publication, Bret Kenwell held long positions in PINS and NVTA.