How do you pick growth stocks?
I bet if you asked 100 investors who were partial to growth stocks what their selection process was for weeding out the winners from the losers, you’d get 100 different answers.
Dummies.com suggests you look for companies in growing industries. InvestorPlace’s Luke Lango recommends companies that use innovation to create excellent products and services that customers can’t live without. Lastly, renowned investor Philip Fisher believed in a capable management team that could create a bold growth plan and execute that plan efficiently.
So, it’s almost futile to try to develop the perfect formula for finding growth stocks with the potential for huge upside.
Four years ago, I recommended 10 growth stocks to buy that still had appreciation potential. Of the 10 recommended in May 2017, I would say Shopify (NYSE:SHOP) was the most successful. It’s up almost 1,270% over the past four years through May 28.
As I look at a list of aggressive growth exchange-traded funds, I see that one of the best performers over that same four-year period is the SPDR FactSet Innovative Technology ETF (NYSEARCA:XITK), up 204%. It’s from that ETF’s portfolio of 98 stocks that I’m picking the seven to recommend here:
- Shopify (NYSE:SHOP)
- Square (NYSE:SQ)
- Twilio (NYSE:TWLO)
- Roku (NASDAQ:ROKU)
- Fiverr International (NYSE:FVRR)
- 2U Inc. (NASDAQ:TWOU)
- Mitek Systems (NASDAQ:MITK)
Growth Stocks to Buy: Shopify (SHOP)
Three-Year Annualized Revenue Growth: 63.3%
Market Cap: $153.9 billion
Industry: Software – Application
One thing I find useful is to go back and reread old articles I’ve written. I don’t do it to critique my writing. Once I’ve written something, it generally doesn’t get a second look. I’m moving on.
I do, however, reread some of my stuff to consider how my opinions have or haven’t changed about a particular stock over the years. When it comes to Shopify, I’ve been behind it since 2017.
In November 2017, I wrote about some of the allegations and assertions made by short-seller Citron Research, most of which were meant to persuade investors that Shopify wasn’t nearly as impressive as people thought.
“Canada’s publicly traded tech companies have a terrible track record for flaming out. BlackBerry Ltd. (NASDAQ:BB) and Nortel come to mind, and Citron Research knows this,” I wrote on Nov. 6, 2017.
“However, Shopify has an obligation to shareholders to keep its eye on the prize and not waste time satisfying the whims of Citron Research.”
Thankfully, CEO Toby Lutke did just that. SHOP stock is up 1,153% since, compared to 63% for the S&P 500 index.
As Matt Damon’s character said in Good Will Hunting, “How do you like them apples?”
Shopify’s come a long way since those allegations first surfaced. Now, it has to deal with the constant arguments from bears that Amazon (NASDAQ:AMZN) will crush it … eventually.
Well, to stave off its impending doom, the company just announced an expanded partnership with Google that will see the two firms work more closely together for the ultimate benefit of Shopify Merchants.
“[T]he companies announced at Google I/O that they are working together on an integration that will enable Shopify merchants to feature their products across Google Search, Maps, Images, Lens and YouTube,” reported ZDNet’s Natalie Gagliordi on May 27.
“The integration is aimed at helping merchants become more discoverable in the Google Shopping ecosystem among high-intent consumers.”
Another smart move by Lutke and company. SHOP stock continues to impress more than three years later.
Three-Year Annualized Revenue Growth: 62.5%
Market Cap: $100.9 billion
Industry: Software – Infrastructure
So far, 2021 hasn’t been great for Square. Except for a couple of hot flashes in February and April, SQ stock has flatlined around the $220 level.
It got a little bit of energy on May 24 when reports surfaced that it would soon offer checking and savings accounts. Bloomberg News found the information while looking through the code used for a Square app update. The company wisely did not comment on the news.
It shouldn’t come as a surprise to investors that Square is looking to do this. Its banking intentions have been fairly transparent over the past 12-18 months.
In March 2020, Square issued a press release that the Federal Deposit Insurance Corporation (FDIC) had conditionally approved its application for deposit insurance for Square Financial Services, its industrial bank catering to small business owners. In the press release, it stated that Square Financial Services would launch in 2021.
That 2021 launch came in March. Square Financial Services will provide loans and deposit products to merchants that use the company’s payment processing and point-of-sale services.
The last time I checked, savings and checking accounts are deposit products.
Back in September 2020, I said Square was on my list of strong buys. At the time, it was trading around $155. Up 42% in the eight months since, nothing’s changed. It’s still very much a top-notch long-term buy.
Three-Year Annualized Revenue Growth: 64.1%
Market Cap: $57.3 billion
Industry: Internet Content & Information
Twilio’s 2021 is very similar year to Square’s in terms of performance. In a word: sputtering. However, if you look at the performance of TrueShares Tech, AI and Deep Learning ETF (NYSEARCA:LRNZ), the ETF with the largest (6.17%) TWLO weighting — it is down 11.3% YTD — if you are a TWLO shareholder, you can take comfort in the fact you’ve only gone sideways in 2021. It could always be worse.
Twilio’s stock bumped higher in mid-May on the news it would acquire business-texting platform Zipwhip for $850 million. Normally, I’m usually wary of big acquisitions, but in this case, it’s buying valuable messaging capabilities for the Twilio platform. In addition, Zipwhip brings 30,000 customers to the table. That’s not chump change.
Jefferies analyst Samad Samana likes the acquisition.
“TWLO has historically relied on third-party aggregators to connect with these carriers,” the analyst told Yahoo Finance. “These direct integrations strengthen TWLO’s carrier relationships and could potentially be beneficial to TWLO’s core business in the long run.”
At the end of the day, this acquisition strengthens Twilio’s communications platform and that’s always good news if you’re an investor.
Of the 28 analysts covering TWLO stock, 23 call it a buy, while two have it overweight, only one rate it a hold, and there are no sells. Twilio’s median target price is $455, or 36% higher than where it’s currently trading.
Three-Year Annualized Revenue Growth: 51.4%
Market Cap: $45.6 billion
When I first read that Roku was contemplating moving further into the connected homes space, I was underwhelmed.
After all, it is the company’s open streaming platform that drives its revenue growth. In Q1 2021, platform revenue increased 101% from a year earlier to $466.5 million (81% of overall sales). The sale of hardware such as set-top devices and streaming sticks accounted for $107.7% million and 19% of overall sales.
On the one hand, most TVs today have Roku installed, so the hardware sales from set-tops are likely to slow over time. On the other, when you’ve already got an engaged customer through a set-top or smart TV, it makes total sense to extend the brand to other smart devices in the home.
So, the fact that it’s hired someone specifically for home technologies speaks to where it plans to take the hardware side of its business.
Could it fail miserably? It could.
However, I would think that everything it’s learned and experienced over the past few years from its existing hardware business will put it in an excellent position to bring out relevant products for its end-user customers.
Since Q2 2020, Roku has had three consecutive quarters of profitability. I expect that this will continue throughout 2021.
ROKU stock has long been a favorite of mine. In early May, it dropped below $300 for the first time since December. If you bought in the $200s, you will be celebrating your good fortune in five years. If it happens again, I’d buy some.
Fiverr International (FVRR)
Three-Year Annualized Revenue Growth: N/A
Market Cap: $6.9 billion
Industry: Internet Content and Information
Fiverr went public in June 2019 at $21 a share. That’s why it doesn’t have a three-year annualized total return. However, it is up 817% in two years as a public company.
How can it possibly keep growing? Because the online marketplace it runs provides companies with a surefire way to secure freelancers for projects they’re working on. It’s a win/win for everyone involved.
InvestorPlace’s Joel Baglole recently identified FVRR stock as one of four growth stocks getting pummeled by the markets despite its businesses performing at an exceptional level. My colleague points out that a return to normal has investors looking ahead, imagining a time when freelancers won’t be quite as important to businesses post-pandemic.
Joel’s right about Fiverr’s business. It’s doing very well. It reported revenues of $68.3 million in early May, double its sales in Q1 2020, and almost 6% higher than the consensus estimate. On the bottom line, it lost a penny in the first quarter, seven cents better than last year, and six cents clear of analyst expectations.
In 2021, Fiverr management expects revenue of at least $302 million with a minimum of $19.5 million in adjusted EBITDA. On the top line, that’s 59% growth over 2020.
I suspect its estimate for the year is a tad conservative. While I understand why the company accounted for a revenue slowdown — work-at-home situations ending throughout the remainder of 2021 and into 2022 — I don’t see the demand for freelancers slowing all that much.
Over the past two quarters, revenues have grown 100% (Q1 2021) and 89% (Q4 2020). I don’t see a comedown to 59%. I guess we’ll see.
2U Inc. (TWOU)
Three-Year Annualized Revenue Growth: 39.3%
Market Cap: $2.8 billion
Industry: Education & Training Services
Digital education jumped to the forefront during the pandemic putting a spotlight on Maryland-based 2U. It specializes in helping educational institutions build their digital and in-person educational offerings.
At the end of April, 2U reported its Q1 2021 results. They included a 32% increase in revenue to $232.5 million. The company’s Alternative Credential segment’s sales jumped by 52% over the same period last year. They now account for 37% of its sales, with 2U’s Degree Program accounting for 63%.
Like most high-growth businesses, 2U loses money. In the first quarter, it lost $45.6 million. However, that was a 24% improvement over Q1 2020. On a non-GAAP basis, it lost $8.6 million in the first quarter, $12.7 million better than a year ago. On an adjusted basis, at least, it’s getting very close to making money.
“Accelerating revenue growth and continued improvement in profitability and cash flow demonstrate the strength of our business model and strategic positioning,” stated CFO Paul Lalljie in its Q1 2021 press release.
In 2021, 2U expects to generate sales of at least $925 million and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $60 million at the midpoint of its guidance.
As long as 2U continues to innovate, TWOU stock investors can expect it to continue to grow exponentially over the next few years.
Mitek Systems (MITK)
Three-Year Annualized Revenue Growth: 30.7%
Market Cap: $741.0 million
Industry: Software – Application
The only selection under a $1 billion market cap, Mitek is also the company I’m least familiar with. However, that doesn’t mean you shouldn’t be excited about its opportunities.
For those of you in my boat, Mitek is best known for building software that helps financial services companies identify their customers and allow them to make mobile deposits of checks. There is no question that the company uses innovation such as artificial intelligence and machine learning to create solutions its customers can definitely use.
While it might stay in the background as it goes about its business, the fact that more than 7,500 customers and over 80 million end-user consumers worldwide are choosing to utilize its products is a testament to its business.
Over the past eight years, it has grown sales by 31%, compounded annually from $9 million in 2012 to $101 million in 2020. In 2020, more than four billion checks were deposited using Mobile Deposit.
Having been a victim of identity theft, I can truly appreciate what Mitek brings to the table. The global identity verification market is expected to grow from $7.6 billion in 2020 to $15.8 billion in 2025. No doubt, Mitek will grab a decent chunk of that.
Now profitable, MITK stock strikes me as one that you forget about and five years later are kicking yourself because it’s become a multi-billion-dollar enterprise that you could have owned when it was valued at well below $1 billion.
It won’t be for long. It’s my diamond-in-the-rough pick of all seven.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.