Let’s first understand what hyper-growth stocks truly are in order to understand the real potential here. Hyper-growth generally refers to companies that provide a compound annual growth rate (CAGR) of at least 40%, whereas growth stocks generally clock in at around a 20% CAGR.
Indeed, this is an important differentiating factor. That’s because the 40% annual growth provided by hyper-growth stocks essentially equates to a doubling of revenues every three to four years. The name of the game for such companies is disruption and scaling as fast as possible.
Profitability is not necessarily the primary concern among hyper-growth stocks. Very large losses are commonplace. However, the priority for most investors in such companies is that the management team focuses on establishing a massive sales base and growing it indefinitely. Only much later do efficiency concerns come into play.
Investors should understand that hyper-growth stocks are coming back into favor as the Fed slows rate hikes. Here are three of my top picks right now.
DraftKings reported $770 million in Q1 revenues. That represented an 85% increase over the $417 million in Q1 ‘22 revenues for the online betting company. These results also represented an earnings beat, exceeding the $704 million Wall Street expected.
Additionally, DraftKings’ losses narrowed more than Wall Street expected. The company’s 51 cents in losses per share were better than the 70-cent losses that were anticipated.
These numbers are a big leap forward for the company, as it brings Draftkings much closer to breakeven. DKNG’s EBITDA midpoint narrowed from -$400 million to -$315 million following the positive news.
DraftKings now expects approximately $3.185 billion as its revenue guidance midpoint. If correct, that would represent more than 42% annual growth, putting DKNG again into the hyper-growth category for 2023.
Snowflake (NYSE:SNOW) is a cloud data warehousing software company that has grown rapidly over the past few years. It provides cloud services that help firms ingest massive amounts of data, as well as computational services to derive utilitarian analytics from that data.
There are a few ways to look at Snowflake as it relates to its hyper-growth status. The company’s growth is clearly slowing. Over the past few years, it has grown at annual rates of 106% and 69%, respectively. This year it’s expected to reach $2.88 billion in sales. That is very close to 40% anticipated growth, though slightly below.
So, Snowflake continues to possess strong potential, although at a moderated pace of growth. Product revenue grew 54% in Q4. And the company boasts a net revenue retention rate of 158%, meaning it grows revenue by 58% on average per each customer. It also has 330 customers that have provided $1 or more in revenue over the past 12 months.
The potential is clearly, there but the market rotates between loving and hating SNOW stock. Judging market sentiment in that regard isn’t always clear cut, which makes investing in SNOW stock risky.
SolarEdge (NASDAQ:SEDG) is a company that falls somewhere between growth and hyper-growth based on current projections. The company sells solar inverters that help transfer solar energy into electricity. In 2022, the company brought in $3.11 billion in revenue, which is expected to increase by 32% to $4.12 billion this year. Again, somewhere between growth and hypergrowth.
However, if SolarEdge reaches the high estimate of $4.41 billion in sales this year, it will eclipse the 40% growth threshold. Regardless of where sales ultimately land, SEDG stock continuously finds itself on lists of well-regarded solar stocks. This leads me to my next point.
The company has done extraordinarily well over the past two quarters, so there’s reason to believe it could reach that upper threshold. During both quarters, earnings per share came in far above the high end of analyst expectations. Additionally, whether SolarEdge reaches true hypergrowth status this year may simply be irrelevant to investors. They’ll likely be just as concerned, if not more, with analyst target prices that suggest shares could increase approximately $80 above their current levels.
On the date of publication, Alex Sirois 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.