There are many ways to make the most of the stock market, but arguably one of the best is to invest in innovative growth stocks.
Growth stocks are companies that are expected to grow their earnings, revenue or cash flow faster than their peers or the market at large. They tend to be industry pioneers with a disruptive product or service that’s changing the game in a significant way. Amazon (NASDAQ:AMZN) is a great example of this in the e-commerce space. Apple (NASDAQ:AAPL) is another well-known innovator that changed the way we listened to music and made investors a handsome pile of cash along the way.
That said, finding innovative growth stocks is harder than it might sound. For every Amazon or Apple there are tens of dozens of failures whose investors were left with losses. Growth stocks make money for investors because their share price rises as their profits, or expected profits, grow. They tend to be valued more highly than peers because expectations are high. But that means missteps can be costly, and volatility is to be expected.
There are a few ways to pick a promising growth stock, but one of the best is to look for margin growth. Margins tell you how much profit a company is able to make. Margins can be thin for a company that’s getting a new product or service off the ground, but ideally, as revenue grows, so should margins. Return on equity (ROE) is another way to asses growth potential. This looks at a company’s net income compared to shareholder equity. The higher the ROE, the more efficiently the company is using its capital.
PayPal (NASDAQ:PYPL) has been around for a long time, so you’d be forgiven for assuming its days as one of the best innovative growth stocks are behind it.
In some respects, you’d be right. The company saw its margins rise rapidly when consumer spending exploded during the pandemic. However once people were back out shopping in person, those gains quickly reversed. Operating margins fell from 17% to around 13% in just over a year.
It was a miscalculation on management’s part, and one that saw PYPL stock lose a fair chunk of its value. But margins are now moving back in the right direction.
Plus, the company’s got plenty of room to run as its user base continues to expand and mobile adoption swells. But these positives have been largely overlooked thanks to the ongoing banking crisis that’s swept through the market.
Despite the fact that PayPal will likely feel very little real pain from the banking story, its shares have fallen 15% in 6 months. That makes for a very attractive entry point for this fintech growth stock.
After a year in the gutter thanks to the semiconductor shortage, Nvidia (NASDAQ:NVDA) is back on the upswing as one of the most promising innovative growth stocks on the market. The company has managed to wedge itself into one of the most promising tech trends of our time— Artificial Intelligence.
Indeed, AI has the potential to disrupt just about every industry there is. Automation is every industry’s best friend, especially as costs rise and workers demand to be compensated in line with inflation. Replacing some or all of your workforce with more efficient technology is a silver bullet for cash-strapped companies.
We’re not quite there yet, but NVIDIA’s chips mean we’re getting closer. The total addressable market for AI chips like NVIDIA’s is expected to reach well into the billions as more people adopt the technology. And given it’s only in its infancy, the potential for NVDA stock is huge.
It’s unclear how quickly big money will move toward the AI trend, so it’s encouraging that NVDA is more than just a one-trick pony. The group also makes chips used in the gaming industry, which should continue to prop up revenue until AI takes off.
SolarEdge Technologies (SEDG)
SolarEdge Technologies (NASDAQ:SEDG) is smack in the middle of a huge trend toward clean energy, making it one of the best innovative growth stocks out there. The group makes inverter systems that power solar panels, so the passage of the Inflation Reduction Act was a boon for the stock. Part of the bill extends the 30% residential solar Investment Tax Credit through 2032, which should boost demand over the next decade. At the same time, SEDG is expected to grow its margins as its Mexico plant comes online.
SolarEdge is also seeing strong growth in Europe, where the push for cleaner energy is even stronger. This was a driving factor behind the company’s 59% revenue growth in the third quarter. With energy costs still weighing on the average household, and governments around the world pledging to achieve net zero carbon emissions, investments in solar power are likely to grow rapidly in the near-term.
SolarEdge’s growth potential in both the US and Europe is impressive, and expanding margins alongside rising demand is the textbook definition for a good growth pick.
On the date of publication, Marie Brodbeck did not hold (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.