Stock markets have reached record highs at an unprecedented pace this year. However, gains have been concentrated among a small group of high-growth stocks. These few but big firms have grown significantly in the past six months, pushing the entire index higher. Analysts call this a “narrow” market. For gains to be sustainable, the market must “broaden out” over the remainder of this year and next. This implies that other stocks have the potential for triple-digit growth, which has made companies like Nvidia (NASDAQ:NVDIA) so successful.
While tech has driven recent market performance, and artificial intelligence (AI) may spur further increases, a broadening market could see strong gains across a wide range of firms. Smaller players, such as data center infrastructure and energy providers, have benefited significantly from AI despite receiving less publicity than larger players. This pattern may repeat itself in other areas if an easing monetary policy stimulates broader market expansion.
The following section highlights three high-growth stocks well positioned to capitalize on potential widespread market increases, doubling over the next year or so.
Lululemon Athletica (LULU)
Speaking of high-growth stocks, Lululemon Athletica (NASDAQ:LULU) has brought athleisure to the mainstream. Although it is probably not the first company to come to mind in the current AI-driven environment, LULU stock has the potential for strong returns.
While the company’s share price has underperformed lately as inflation squeezed consumer budgets and competition rose, several factors could help reinvigorate growth. Inflation is stabilizing, wages are growing faster than prices and expected interest rate cuts may spur more consumer spending. This could benefit Lululemon’s domestic sales. Internationally, sales jumped 40% on a constant exchange rate basis last year, thanks to a 25% increase in comparable sales. This means that the company does not need to rely solely on its home market – it is experiencing robust overseas growth, opening up a large potential market.
The 50% drop in Lululemon’s share price this year has left it with a reasonable price-to-earnings (P/E) ratio of 20.5 times versus the 26.1 times the apparel sector average. More important, Lululemon’s 16% profit margin vastly exceeds its competitors’ 6.2% average. The company demonstrates strong profit generation capabilities and is forecast to grow earnings at a comparable rate going forward.
Analyst estimates give Lululemon stock an average $378.05 target price over the next year. However, some analysts point to Lululemon’s track record of beating estimates and believe the stock could reach $525 per share in the next 12 months, representing nearly 40% upside.
Super Micro Computer (SMCI)
We can’t ignore a tech company experiencing strong demand in the current environment. This is especially relevant as Super Micro Computer (NASDAQ:SMCI) is a leading server manufacturer powering artificial intelligence and cloud services.
According to Moody’s, Super Micro’s sales increased 200% over the last year as global data center capacity is estimated to double in the next five years. With unrelenting demand, the company’s management believes it can continue gaining market share, as evidenced by rising guidance in its most recent earnings report.
While not as well-known as Nvidia, Super Micro is no longer under the radar, with a P/E ratio of 36.9x, just below the average for the broader tech sector of 45.2x. However, factoring in analysts’ expectations, the upside potential is compelling at 53% to the average price target of $1,025.58 per share. Additionally, surpassing $1,000 per share would make SMCA an attractive high-growth stock for a split, which often lifts share prices.
Duolingo (DUOL)
While the online language learning app Duolingo (NASDAQ:DUO) fits the definition of a tech stock, DUO stock is down almost 26% so far this year after surging 213% in 2023. However, this confirms Duolingo’s potential as one of the high-growth stocks.
The company continues to grow in key metrics despite concerns that AI may make learning new languages obsolete. Monthly active users grew 35% over the prior year, with subscription bookings rising 47%. Additionally, free cash flow (FCF) more than doubled from the prior year.
This level of growth has attracted significant investor interest, as shown by Duolingo’s high P/E ratio of 165.9x, indicating that analysts foresee continued profit growth. They predict the company’s bottom line will jump 383% to $1.69 per share this year.
The average price target represents an almost 50% upside potential in the short to medium term based on expectations of substantially growing earnings through 2025. Duolingo reveals potential as a high-growth stock in the online education sector.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, Stavros Tousios 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.
