Growth stocks have the potential to outperform the stock market due to their growth opportunities. Many of these investments have high valuations that investors justify by looking several years into the future.
Some growth stocks live up to their lofty valuations and accumulate generational returns for early investors. However, other corporations fall flat and destroy shareholder value over several years. It takes a lot of effort to find the right growth stocks, and unfortunately, some people are better off with an index fund.
However, there is a middle ground. Some growth stocks have reasonable valuations and compelling growth prospects. These are some of the top undervalued growth stocks to consider.
Texas Roadhouse (TXRH)
Texas Roadhouse (NASDAQ:TXRH) is a fast-food restaurant chain that specializes in American steaks. Many restaurant stocks have been soaring in recent months, and Texas Roadhouse is no exception to the run. Its stock is up by 38% year-to-date and has gained 213% over the past five years.
The stock trades at a 34 P/E ratio and offers a 1.39% yield. The restaurant chain has raised its dividend for 12 consecutive years and has an annualized dividend growth rate of 16.05% over the past decade.
Texas Roadhouse continues to report solid financials that suggest the steakhouse chain can build on its successes. Revenue increased by 12.5% year-over-year (YoY) in Q1 2024, while net income was up by 31.0% YoY. Comparable restaurant sales increased by 8.4% YoY at company restaurants. Franchise restaurant sales grew by 7.7% YoY.
The company consists of 644 company restaurants and 109 franchise restaurants, bringing the total to 753 restaurants. It’s a 7.0% YoY improvement from last year’s 704 restaurants.
Moody’s (MCO)
Moody’s (NYSE:MCO) is a fintech firm that has been outpacing the stock market. The stock is up by 123% over the past five years and is currently up by 8% year-to-date. Shares trade at a 44 P/E ratio and offer a 0.82% yield. The risk management firm has raised its dividend for 15 consecutive years and has maintained a 12.42% annualized dividend growth rate over the past decade. The quarterly dividend is currently $0.85 per share.
Results from Q1 2024 highlight Moody’s growth. Revenue increased by 21% YoY to reach $1.8 billion. Meanwhile, diluted EPS was up by 16% YoY — $3.15 per share. Moody’s Investors Service segment was a big winner, which showcased 35% YoY revenue growth.
Moody’s is currently rated as a Moderate Buy among 11 analysts. The highest price target of $450 per share suggests the stock can gain an additional 8% from current levels.
Meta Platforms (META)
Meta Platforms (NASDAQ:META) checks several boxes as an undervalued growth stock. It trades at a 27 P/E ratio and has impressive financial growth. Revenue increased 27% YoY in the first quarter, while net income surged by 117% YoY. Net income growth is important since it leads to a lower P/E ratio, creating a margin of safety.
The company has been making big investments in artificial intelligence, but advertising is still the main driver of the growth story. Meta Platforms’ business model lives and dies on advertising, and it’s been vibrant for many years. A 7% YoY increase in daily active users on the company’s social networks suggests ad revenue should continue to grow.
Shares are up by 33% year-to-date and up 158% over the past five years. Wall Street analysts believe shares can reach new heights. The average price target suggests a 12% upside from current levels.
SoFi (SOFI)
SoFi (NASDAQ:SOFI) makes it on the list due to an ambitious multi-year growth plan that is coming to fruition. While the company has been unprofitable for several years, the company recently flipped the switch, and profit margins have been expanding rapidly.
SoFi came out of Q1 2024 with a sterling 13.8% net profit margin. It’s a big turnaround and hasn’t come at the cost of growth. Revenue increased by 37% YoY in the quarter, while net income flipped from a $34.4 million net loss in Q1 2023 to a $88.0 million profit in the recent quarter.
The fintech firm is diversifying its revenue streams beyond lending and is growing in multiple verticals. SoFi now has 8.1 million members, a 44% YoY improvement. The firm added 622,000 members in the quarter. SoFi has been a roller coaster, but the stock is finally presenting a compelling long-term opportunity that can generate meaningful growth in a few years.
American Express (AXP)
American Express (NYSE:AXP) offers growth at a reasonable price. Shares trade at a 19 P/E ratio and are up by 29% year-to-date. The stock has also more than doubled over the past five years and offers a 1.17% yield. Dividend growth has also been solid, and the company recently announced a 17% dividend hike.
The fintech firm’s status as a dividend growth stock with a respectable yield has attracted investors, but so have its financials. Q1 2024 revenue was 11% higher than the same period last year. Net income was also up by 34% YoY. Higher profit margins and growing revenue should bring down the P/E ratio and make the stock more attractive for patient investors.
The Q1 earnings report revealed some pleasant news about the company’s long-term opportunities. More than 60% of the company’s new accounts came from Millennials and Gen Z consumers. The firm’s ability to retain consumers from those generations points to more growth in the years ahead.
Alphabet (GOOG, GOOGL)
Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) trades at a 27 P/E ratio and offers a 0.45% yield for investors. The company recently issued its first dividend and should have a high growth rate moving forward. Although the yield is low, Alphabet stock has been soaring. It’s up 28% year-to-date and has gained 214% over the past five years.
The stock has a reasonable valuation and strong momentum, but earnings determine if the gains are meant to last. Luckily for investors, Alphabet reported impressive Q1 2024 results. Revenue increased by 15% YoY, while net income was up by 57% YoY.
Alphabet generates most of its revenue from online advertising. Google and YouTube are two of the most popular websites available, and advanced targeting capabilities make those two platforms great choices for many businesses. However, the company is also expanding its cloud computing segment. Google Cloud now represents more than 10% of the corporation’s total revenue.
Nu Holdings (NU)
Nu Holdings (NYSE:NU) is a Brazilian digital bank with roughly 100 million customers. The stock has a 45 P/E ratio and is up by 41% year-to-date. The online bank boasts high gross profit margins that reached 43.2% in the first quarter of 2024.
High-profit margins weren’t the only good news from Q1 results. Revenue increased by 69% YoY, while net income soared by 167% compared to the same period last year. Wall Street analysts believe there is more upside to the stock. It’s currently rated as a Strong Buy, with a projected 13% upside.
Nu Holdings’ diversified product line includes portfolios, bank accounts, credit cards and other financial products. Revenue and earnings growth have been high for a while, and continued growth can make the valuation easier to justify. While a 45 P/E ratio is higher than most investors may like, the stock also has a more reasonable 27-forward P/E ratio.
On this date of publication, Marc Guberti held long positions in SOFI and GOOG. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
