The recent sell-off of high-growth businesses this year has actually opened up a significant buying opportunity for investors who previously might have been priced out of entering into this market. But with the pull-back likely over for the time being, the chance to get in cheap could be short-lived. Here, we go over some of the best growth stocks that have the potential to go up 10-fold over the coming decade.
Snowflake (SNOW)
Among the many key traits of a high-performing growth stock is the ability to grow a customer base while monetizing the business itself to generate increasing cash flows. Luckily for investors, Snowflake, a cloud computing-based real-time analytics and data warehousing firm, has been doing just that lately.
As more and more businesses migrate operations to the cloud, companies such as SNOW have seen a huge uptake in demand for their services. Add in the fact that a large proportion of the workforce today works remotely from traditional places of employment – due mainly to ongoing health-related restrictions, but also because of emerging secular trends – it now seems that there’s almost exponential potential for cloud expansion in the future.
Indeed, Snowflake is seeing large customer momentum in the pandemic era, as its customer count grew to 5,416, a 52% increase year-on-year. Of those clients in the most lucrative revenue bracket – i.e. customers that account for over $1 million in product sales the previous 12 months – this growth has risen even higher to 128%.
This high-value customer growth has also necessarily led to increased revenues too, with the company posting a top-line annual income of $592 million for the financial year 2021 – another triple-digit growth win, this time of 124% year-on-year.
Most impressive, however, are SNOW’s net revenue retention rates (NRRR). NRRR is a measure of how fast a business is growing its revenues from the same batch of customers, from one quarter to the next. Snowflake’s current NRRR is a very healthy 173%, which means that the firm’s average customer is spending 73% more with the company than it did it the previous reporting period.
One issue that Snowflake does have, however, is its high expenditure losses. During the Third Quarter 2022, SNOW lost lost $154.9 against sales of $334.4 million, suggesting that the business was having to spend 46 cents for every dollar it took in as revenue.
That said, SNOW was actually losing $1.06 last year for each dollar it got in sales, implying that the company is turning round these unwanted losses and making improvements. If it can keep this trend up, it will be well set for profits in the future.
DermTech (DMTK)
It might be a cynical thing to say, but the pandemic has made it an exciting and profitable time to be in the bio-pharma industry of late. And while innovative vaccine manufacturers have been getting all the headlines recently, there’s more to the sector than just those fighting the fight against the healthcare panic.
In fact, one of the fastest growing companies to emerge in the diagnostics space over the last few years is DermTech (DMTK), a cancer detection firm genuinely revolutionizing the field.
DermTech is a precision dermatology outfit that specializes in the development and production of diagnostic techniques used in the detection of skin cancers, especially melanoma.
The firm’s proprietary SmartSticker technology is an effective and accurate alternative to traditional invasive biopsy procedures, which DMTK claims improves patient comfort and is cheaper in the long-run.
The company’s genomics platform is so efficient in detecting the genes expressed in cancer tissue that it actually reduces the risk of missing a deadly cancer diagnosis to less than 1%, and is able to sample 100% of the offending lesion – something unheard of in skin cancer detection methods before.
DMTK recently reported its Third Quarter 2021 results in November, with the news being something of a mixed bag.
The company continues to grow its revenues sequentially, improving the quarter-to-quarter top-line by a modest 2%. Total test volumes remained fairly flat, but the percentage of paid-for tests did increase.
Unfortunately, DermTech also missed it revenue and EPS targets for the quarter, despite the fact that it increased revenues of $3 million by 121% year-on-year.
Even worse, however, was the announcement by management that it was revising its full year revenue down to between $10.5 million and $12.0 million, some way off the consensus estimate of $13.3 million.
The revised revenue guidance didn’t go down well; shares fell 16% on the news, and haven’t recovered still. But investors shouldn’t overly worry this development too much just yet. DermTech (DMTK) is in the process of disrupting a relatively conservative and resistant industry, and it won’t be for a while yet before the company really begins to reap the enormous potential that the space promises.
Indeed, the skin cancer market alone represents about a $10 billion opportunity, with cash flowing roughly equally from Medicare and commercial payors both, with DMTK especially ready to exploit the commercial sector with highly diversified revenue channels in place.
The company already has a working team of direct and inside sales reps operating in multiple regions with established medical science liaisons. Then there’s the emerging telemedicine sector to think of, as well as its integrated primary care networks and employed health clinics.
With its drop in value since February this year, DMTK has become a much more cheaper option to investors than it once was.
Interestingly, DermTech is actually up over 50% in price in 2021, but its current stock rating of $17 is a pale shadow of its early-year highs of almost $80. The company’s forward price-to-sales ratio is still fairly high at 43x, but not too high for a growth business of its kind.
The firm’s efficiency and liquidity isn’t in question, and its working capital growth of 382% should ameliorate investor’s fears that the company won’t to able to fund further expansion.
Non-invasive alternatives to surgical interventions are sure to be the preferred norm where and when they can be found, and this is DermTech’s secret sauce when it comes to rapid growth in the coming years. Once physicians – and patients – wake up to this reality, it’s anyone’s guess as to how high DMTK can go.
Source: Unsplash
Coinbase (COIN)
There’s almost no doubt today that the crypto-currency market has gone thoroughly mainstream. And that’s been a boon for companies like Coinbase (COIN), whose fortunes are intimately tied to the rapid uptake of digital assets both now and in the future.
Once a fringe preserve of geeks and nerds, digital currencies and blockchain technologies are now finding their way into the portfolios and company balance sheets of such highly renowned Wall Street figures as Cathie Wood and Michael J. Saylor.
However, it’s not all been an even ride for crypto-adjacent businesses like Coinbase. Since going public earlier this year, COIN’s share price swung widely from highs of $350 to lows of $220.
There’s the obvious issue of volatility here – an always present threat in the crypto world – and how that impacts on the running of real businesses like Coinbase. As a platform for the buying and selling of various crypto-currencies, it seems impossible for an enterprise like COIN to insulate itself from this problem. If demand for digital currencies goes up, Coinbase will do well if demand goes down, it inevitably suffers.
Solving this problem might never happen – and it might never actually need to happen either. At the present time, the crypto market is enjoying a boom season, with stories of once obscure, joke currencies making their holders billionaires almost overnight.
But with the normalization of digital assets becoming a real thing, there’s also a whole host of other industries that can be built on top on these quickly proliferating blockchain technologies. And it’s this promise that can really pay-off for Coinbase.
Indeed, COIN has already diversified from its core business of providing its Coinbase Wallet services for retail investors, and its Coinbase Custody product for institutional traders, and branched out into the credit field with the Coinbase Card, a Visa card catering for crypto-currency owners, and Coinbase Earn, a micro-payments platform.
Coinbase is massively profitable right now, with a Third Quarter EPS of $1.62 beating analyst expectations by $0.19. Ironically, COIN’s huge Q3 revenue growth of 316% year-on-year of $1.3 billion actually missed Wall Street’s target by $270 million – but the underlying story of phenomenal top-line expansion can’t be ignored.
But quarter-by-quarter comparisons were highly unfavorable, seeing double-digit drops in metrics for monthly transacting users, institutional trading volume, retail trading volume and assets on platform. Again, this is probably tied into the performance of the crypto market itself, which has seen losses over the quarter on some big name currencies.
Don’t bet against Coinbase and crypto just yet though. There’s a long way for this industry to go yet – and COIN will be there all the way.
Upstart (UPST)
This won’t be the first time you hear the term “disruptor” in this article, and there’s a good reason for that. High-growth enterprises tend to do things differently from their legacy rivals, and the ability to shake things up in an industry is what gives these businesses the power to grow over and above their more staid competitors.
In the insurance game they don’t come much more disruptive than Upstart (UPST), who, having only gone public as a company in December 2020, is now one of the hottest properties on the NASDAQ Global Select.
The fintech’s price ride this year has been a tale of Sisyphean proportions; the company started 2021 trading shares at around $40 a pop, only to explode in value over the next ten months, almost reaching $400 by mid-October, but dropping sharply thereafter. Its stock actually appears to be in free-fall right now, currently sitting somewhere close to the $160 mark.
But what caused this massive upswing in the first place – and why did it crash so spectacularly in such a short space of time?
To begin with, not unlike any other great growth stock, UPST has been posting excellent revenue figures for multiple consecutive quarters now. The company grew its overall top-line from $65 million in Q3 2020 to $228 million in Q3 2020, representing a year-on-year increase of 250%. Its gross profit margin is also high for the sector at 86%, and its income from operations of $29 million is up 134% for the year as well.
However, it’s Upstart’s business story that really gets investors salivating. The company is famous for the way it’s revolutionized the fundamental assumptions of the insurance industry, principally the hammer blow it dealt to the FICO score used by most underwriters.
For those that don’t know, the FICO score – named after the San Jose-based Fair, Isaac, and Company data analytics firm – is a credit rating system that uses information about customers held on credit files operated by the big three credit bureaus: Equifax, Experian and TransUnion.
While the precise details of the model are meant to be secret, it’s generally accepted that the formula takes into account information regarding a person’s payment history, the types of credit they’ve previously used, their debt burden, their length of credit history and any recent searches for credit.
The FICO score isn’t the only kind of credit rating system used in the United States, but it is one of most well-established, and all the alternatives available work in a similar way.
That was the case, however, until Upstart arrived on the scene. Armed with its own AI-fueled proprietary lending platform – and a customer base eager and ready for change – the seismic repercussions from what UPST represented couldn’t be ignored.
Previously, only around 40% of American citizens enjoyed access to prime credit products, despite the fact that 80% of those citizens had never failed to make a repayment on any credit line that they’d had before. That opened up a huge potential market for Upstart – a market that its rivals were happy to ignore or overlook, and a market that with Upstart’s 67% instant approval rating and all-digital experience, was ready for the taking.
And the future’s looking good for Upstart too.
The company already has an $81 billion opportunity in the personal loan originations market, but it’s in the auto loan and mortgage space – with $672 billion and $4.5 trillion respectively up for grabs – that UPST can really shine.
After its latest price slump, Upstart is trading at just 18x its forward price-to-sales, a ratio not at all bad for a company in its position. As some nervous investors lose their mettle and move out of perceived “riskier” fintech stocks, it might be just the right time for other more steely-nerved traders to start moving in.
Source: Unsplash
Affirm (AFRM)
Another disruptor in the fintech space is Buy Now, Pay Later provider (BNPL) Affirm. The company is a leader in the deferred payment business, offering credit solutions to customers who wish to make online purchases on an instalment-by-instalment basis.
The BNPL trend appears to be taking the world by storm, and Affirm, as one of the markets most dominant pure-play BNPL businesses, is in a perfect position to capitalize on it. The company recently moved forward on an exclusive deal with Amazon that will see AFRM act as the only non-traditional provider of BNPL services on the e-commerce giant’s marketplace platforms.
However, the deal does come with some major downsides.
Firstly, there’s nothing in the agreement that will stop established credit card companies from offering BNPL products on Amazon at a later date, especially since the arrangement only applies to Amazon’s current payment options on its website.
Furthermore, Affirm has agreed to give Amazon a raft of warrants – up to 27 million in fact – which are currently worth a lot more than AFRM’s present share price.
And finally, the exclusive deal only lasts until January 31, 2023, throwing up the question whether the partnership is worth the potentially high cost to Affirm.
Perhaps this is why the market had a lukewarm reaction to the Amazon news; indeed, AFRM’s share price has fallen pretty hard since the deal was announced, dropping from highs of $168 in early November to a low of ~$115 today.
But there’s still plenty of reasons to get excited about Affirm outside of just its partnership with the world’s largest online retailer. BNPL is a massive growth trend in the credit industry at the moment, most notably with younger shoppers, as usage among millennial customers having doubled in the last two years.
Fears over burdensome debt levels, and a move away from traditional credit card lenders, has seen an estimated $100 billion spent through BNPL channels in 2021, up from a previous total of $24 billion the year before.
It’s not only Affirm (AFRM) who’s making waves in the Buy Now, Pay Later world, however. There remains considerable competition from the likes of PayPal, Mastercard and Square.
That said, AFRM has been in business nearly ten years now, and has considerable expertise in the industry. The company only went public at the beginning of 2021 though, and interest among investors really got going when they saw the revenue gains the firm was making – its top-line of $269 million grew 55% year-on-year for the First Quarter 2022, down in large part to an 84% increase in gross merchandise volume too.
If Affirm maintains its cash flow metrics while the wider adoption of BNPL takes place, there’s no telling where this company might be in 10 year’s time.
Futu (FUTU)
Futu (FUTU) is an online Chinese brokerage firm that’s witnessed a major sell-off of its shares since late-June this year. The Hong Kong-based holding company was trading around the $180 point earlier in the summer, but concerns surrounding regulatory crackdowns by the Chinese state have seen its stock fall more than 75% to just under $50 today.
While this isn’t such great news for those owning FUTU shares before, it does present an enticing prospect for investors who suspect a recovery might be on the cards.
The underlying fundamentals of Futu’s are good; the company had a stellar Q2 2021, wherein it added a net 211,000 accounts over the quarter, and also broke the 1 million mark for paying customers too – an increase of over 230% from the previous year.
However, this was slightly overshadowed by a Third Quarter in which the company missed Wall Street’s bottom-line predictions, but still beat on revenues of $222.4 million, up 83% year-on-year.
Key customer metrics were still improving, though – total registered clients grew 119.9% to over 2.5 million, and its total number of users of 16.6 million increased 58.6% too.
Despite the ever-present political risks of being a Chinese company, FUTU has a lot of opportunity for growth in the future. Futu is set to start generating monies from the Singapore stock trading market, which has a preferable client profile given the region.
The average investment size in Singapore for the typical investor stands at around $4,500 USD, similar to that of a regular Robinhood (HOOD) account holder in the US.
Furthermore, the average age of a Singaporean investor is about 30 years old, meaning that the clientele the company can expect to attract is relatively young and likely to be around for a long time to come.
In addition to this, Futu also has plans to offer Singapore-based clients access to the Hong Kong retail IPO market as well. In fact, its Hong Kong operations will be critical it its overall performance too. The company is a market leader in Hong Kong, and, if it can defend its position there, it’s likely to leverage that dominance into strong profits going forward.
Zoom (ZM)
Investors looking for a bargain price growth company right now might be surprised to find that Zoom Video Communications, Inc. (ZM) – a big winner among the stay-at-home stocks that soared throughout the health crisis – is trading at a very heavy discount to its recent all-time high.
Having lost over 50% of its market value in 2021 alone, the teleconferencing outfit is out of favor with investors after what many people obviously considered a fairly lackluster third quarter earnings report.
Despite the fact that ZM recorded a marginal bottom-line consensus beat and a revenue increase of 35%, it didn’t stop a wide scale sell-off of its shares which took its price below $200 for the first time since May 2020.
One of the problems affecting Zoom at the present time is its excellent historical performance, which necessarily makes present day comparisons hard to rival. That 35% revenue fraction might have been acceptable for any other company, but for Zoom it represented a slowdown in growth, having clocked a 54% increase in the period prior, and even a couple of quarters above 300% at the end of last year and the beginning of this one.
But while a mild slowdown in ZM’s top-line figures might be the rationale for the post-Q3 results drop, it can’t adequately account for the awful year ZM has had so far. This can really only be explained by how investors view Zoom’s place in a post-pandemic world, and whether it can not only thrive in such an environment, but whether it can just about survive.
The crisis obviously accelerated some pre-existing secular trends in society, notably the rise of e-commerce, digital payments, and online entertainment streaming. Many companies were able to profit off of the back of these shifts in consumer habits, and, in a somewhat ironic way, the global health emergency turned out to be a boon for business.
But as always happens in any natural cycle, the pendulum has to swing back the other way. Investor confidence in high-growth enterprises such Zoom, whose video-conferencing solutions were a perfect fit for locked-down employees having to work from home, began to wane as life returned to normal, and the once unique selling points of these innovative companies evaporated in the cold, clear light of a post-pandemic day.
But this dire spin on Zoom’s fortunes doesn’t have to be the last word. There is, luckily, a massive growth driver hiding in plain sight for the company – and that comes by way of its Zoom Phone, a modern cloud phone system that provides a single platform for voice, chat, videos and meetings, with additional functionalities including Salesforce integration, phone number porting, shared line groups and enhanced analytics.
Zoom Phone represents for the company a big opportunity at a low cost, as the Voice Over Internet Protocol (VoIP) market – which the product is built of off – was estimated to be worth $69.3 billion in 2020, with a compounded annual growth rate (CAGR) between 2016 to 2024 of 20.4%.
The specific domain that Zoom Phone will most likely disrupt first, the legacy private branch exchange system (PBX) is also reckoned to have a market value of $15 billion.
Replacing the old PBX network in the coming years should be a strong tailwind of growth for Zoom, especially since the company offers its own on-premises PBX migration package at $525 per license, less than half the industry average at $1,196.
What’s more, Zoom is already growing customer numbers at a rapid clip, with 212% growth in clients with more than ten employees, and 241% growth in the category of customers who spend more than $100,000 with Zoom every year.
If ZM can realize the promise of its Zoom Phone, and recapture some of that revenue growth it’s been famous for lately, it should go some way in stabilizing investor’s short-term fear that the company has run its course.
In fact, missing from this analysis so far is Zoom’s strong net dollar expansion rate – which was over 130% for the 14th consecutive quarter – not to mention the firm’s favorable acquisition costs, where the business is able to bring in $1.79 in profits for every $1 spent on marketing.
And while it might not match the 326% year-on-year growth in had throughout fiscal 2021, if things go right it should be able to come somewhere close.
Celsius Holdings (CELH)
Another stock whose fall in share price recently makes it a possible value proposition is Celsius Holdings (CELH), a Boca Raton-based energy drink manufacturer. And despite the fact that the company’s stock is up a breathtaking 76% for the year, it’s significantly down from its high of $108.
CELH’s growth story so far has been pretty impressive. The company increased year-over-year revenues in the third quarter to nearly 158% overall at $94.9 million, with its North America domestic sales expanding even quicker at 214%.
The problem for investors, however, is that, even after its sell-off over the last couple of months, Celsius remains somewhat overvalued. Its trailing twelve month GAAP P/E ratio is an eye-watering 568x, and its forward price-to-sales multiple of 16x is still high compared to the Consumer Staples average of 1.4x.
The question that has to be asked here is whether the promise of high revenue growth in the future is worth paying such a premium today, and whether any upside in the stock is already baked into its current valuation.
One major plus point in Celsius’s favor is its commitment to producing sports drinks that deliver nutritional value, and not just an intense energy kick. This commitment already sets it apart from other industry leaders in the space – such as Red Bull, Monster and PepsiCo (PEP) – whose offering are sometimes considered little more than sugar water with caffeine added.
Indeed, those three brands account for over 86% of all energy drink production in the world, and if CELH can make inroads into that dominance it could work out very well for revenue generation in the future. That said, to do this the firm will need to grow its operations over the coming quarters, but its steep price-to-cash flow fraction of 571x might suggest that the funds needed to cover this expansion might just not be there.
Ultimately, the drop in share price for Celsius Holdings offers investors an excellent buying opportunity for a company well-established in an industry worth $57.4 billion in 2020. With a developing nutritional moat in the space, and rising sales, CELH could easily be a 10-bagger within the coming decade.
Source: Unsplash
Sea Limited (SE)
The fortunes of Shopee and Sea Money owner Sea Limited (SE) were fairly similar to Celsius Holding’s this year, with the Singaporean holding company’s shares up 18% in 2021, though significantly down since a November sell-off that wiped 37% off its valuation.
But that’s about where the comparisons end between these two major growth stocks. Sea Limited, in contrast to CELH’s pure play specialization, is a hugely diversified tech conglomerate with interests in e-commerce, computer game development and digital finance solutions, with a global reach spanning across multiple continents.
Why SE’s stock price fell so dramatically recently is a complicated affair, involving rising interest rates and a revised Wall Street consensus in the wake of the company’s Q3 2021 earnings results.
On that matter, Sea Limited didn’t do too badly, with revenues of $2.7 billion growing 125% year-on-year, beating analyst’s expectations by $240 million.
The firm did miss its EPS target slightly, with a loss per share of $0.84. The fact that SE still isn’t profitable didn’t come as any surprise, as the company continues its early-stage growth phase, increasing its quarterly active users to 729 million, and growing quarterly paying users by 42.7% year-on-year to a total of 93 million. However, average bookings per user remained fairly static at $1.7, which was just in line with the same quarter in 2020.
Long-time observers of SE will already know that its main profit-generating segment, Garena, derives most of its cash from the success of its Free Fire battle royale game, which has been a hit among gamers across the globe.
And while it’s good news that the franchise continues to maintain its slot as Southeast Asia, India and Latin America’s highest grossing mobile game, it might be concerning to some investors that the company more than doubled its sales and marketing expenses in the third quarter from $45.8 million to $108.6 million, suggesting that the brand might be waning, requiring higher input costs to maintain sales.
But pessimism isn’t the order of the day with Sea Limited. The company has huge growth potential across multiple fronts, and is really just at the beginning of this adventure. The money from its video games subsidiary Garena are funding the growth of Shopee and Sea Money, and once those two segments become profitable only the sky’s the limit for this Southeast Asian megalith.
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