Growth stocks have been a reliable choice for many years. Besides a brief crash at the start of the pandemic and a disappointing 2022, growth stocks have generally rewarded long-term investors.
These stocks tend to outpace less risky assets due to higher revenue and earnings growth. While some growth stocks have lofty valuations and questionable timelines for profitability, others are already profitable with reasonable valuations.
While growth stocks have more dramatic price swings, investors with lengthy time horizons exceeding a decade can wait out the dips. Buying promising growth stocks with good financials and great runways can lead to outsized returns in the long run.
Nvidia (NVDA)
Investors have poured their money into Nvidia (NASDAQ:NVDA) for years, but the company’s dominant position in artificial intelligence (AI) attracted more attention in 2023. The stock has more than doubled over the past year and is up more than 1,300% over the past five years.
Those types of gains will get any investor’s attention, but the company’s valuation and financials suggest the rally isn’t over. Nvidia trades at a reasonable 26-forward P/E ratio. That valuation is justified due to the company’s robust revenue and earnings growth.
In the third quarter of fiscal 2024, Nvidia reported 206% year-over-year revenue growth and 588% year-over-year net income growth. Revenue and earnings also grew 34% and 49% quarter-over-quarter, respectively. Most companies would love to have those growth rates as year-over-year results.
Founder and CEO Jensen Huang cited accelerated computing and generative artificial intelligence as two key components of the company’s ascent. While staying focused on AI is easy, Nvidia has other vibrant segments. Gaming and Professional Visualization experienced 81% and 108% year-over-year growth, respectively.
Nvidia’s GPU chips dominate the industry, and the growth story may remain intact for several years.
Elf Beauty (ELF)
While many growth stocks have the distinction of being tech companies with scalable platforms and software, Elf Beauty (NYSE:ELF) breaks from those expectations.
The company produces beauty and skincare products that use ethical ingredients instead of ones that stem from animal abuse. The brand’s social messaging and quality products are a hit among Gen Z customers and are expanding to Gen X customers.
The stock trades at a 72 P/E ratio, higher than a value investor would like. However, the company’s growth justifies the price tag. Elf Beauty has achieved 16 consecutive quarters of net sales growth, but it gets even better.
Revenue growth has been accelerating in recent quarters instead of contracting. In other words, Elf Beauty has a large addressable market and is reaching new customers faster than before.
In the second quarter of fiscal 2024, Elf Beauty delivered 76% year-over-year net sales growth and almost tripled its net income year-over-year. Elf Beauty has given investors many reasons to feel confident about future growth prospects.
It’s been a great ride for investors as shares are up by almost 1,800% over the past five years. The stock has more than tripled over the past year.
Palo Alto Networks (PANW)
Palo Alto Networks (NASDAQ:PANW) is a growth stock that fulfills the common trope of impressive growth at a high valuation. Shares trade at a 57 forward P/E ratio thanks to surging net income growth.
The cybersecurity firm started the first quarter of fiscal 2024 with GAAP net income rising from $20.0 million to $194.2 million. That translates into an 871% year-over-year increase. Revenue grew by a respectable 20% year-over-year, while the company’s remaining performance obligations grew by 26% year-over-year. Growth in remaining performance obligations suggests revenue growth will carry over into the next quarter.
Nikesh Arora, chairman and CEO of Palo Alto Networks, cited “an unprecedented level of attacks” for fueling strong demand for cybersecurity software and services.
Cybersecurity is a lucrative industry. Unfortunately, cybercrime is also a lucrative industry for hackers who obtain vital information and resources. While cyberattacks on large corporations often become headlines, hackers target smaller companies and individuals with fewer protections.
Cybersecurity is a necessary defense against unethical hackers. Investors looking for promising sectors should consider how this feedback loop works for cybersecurity firms.
As long as there is a villain, a hero will always be needed. Cybersecurity companies like Palo Alto Networks are the heroes in this case, and that dynamic has resulted in significant returns for shareholders. The stock has more than doubled over the past year and is up 360% over the past five years.
On this date of publication, Marc Guberti held long positions in NVDA and ELF. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
