3 Stocks with High Earnings Growth

[#3] Digital Ocean Holdings Inc. (DOCN)

Digital Ocean Holdings Inc. is a recently floated cloud computing company delivering on-demand platform infrastructure and start-up tools to developers and small-to-medium sized businesses (SMBs). 

The company launched its IPO in March 2021 with an initial price offering at the high-point of its expected per share value of $47. The stock opened down 12% at $41.5, and has been trading more-or-less sideways ever since.

Ocean’s stated business aim is to simplify the adoption of cloud computing applications for SMBs and start-up enterprises. It does this by offering convenient and intuitively packaged services, with a transparent pricing model and the ability to easily to scale up and down with the evolving needs of the customer’s business.

The company also provides round-the-clock support, and its cloud-native architecture is fully open source – meaning that there’s no technology lock-in, guaranteeing total flexibility for its many users.

The cloud computing sector for medium-sized companies with 500 employees or fewer is expected to grow massively over the next few years. The total addressable market is slated to reach $116 billion by 2024, and Digital Ocean is aiming to take a large slice of this business by leveraging its already large customer base.

Indeed, the company has so far built up its operations to the point where it now has 3.5 million unique community visitors every month, with a customer footprint across 185 countries and 14 data centers in 8 different regions.

The firm’s first quarterly results as a publicly traded company were encouraging right across the board. Ocean’s revenue grew 29% year-on-year, its adjusted gross profit margin increased to 79%, and its CAPEX was down from 44% to 25% of Q1 2020 revenues – representing a greater-than 54% reduction from the same figures in fiscal 2018.

The company has also been growing total customers consistently over the last year, as well as its Net Dollar Retention rate, which has been increasing sequentially over the last four quarters.

With Digital Ocean’s experienced management team at the helm, investors should feel confident about the company’s future prospects. Its differentiated cloud platform and superior customer experience places it in a strong position relative to its peers, and with secular tailwinds pointing to further adoption of cloud computing and its improving financial position, this should be a strong growth stock for years to come.

[#2] InterDigital, Inc. (IDCC)

InterDigital, Inc. is a research and development company producing wireless communications technology for the mobile devices and services sector globally. The firm has one of the world’s largest patent portfolios, as well as a staff of nearly 300 highly trained engineers working in its various innovation and research labs.

The company mainly generates revenues by licensing its wireless and video technologies to leading technology enterprises in the 5G, AI, and IoT markets. However, its portfolio of over 32,000 patents is pretty broad-based, and the firm has research interests in many other areas too.

In its latest financial results, InterDigital reported growing operating income more than double from $4.7 million in the first quarter of 2020 to $12.0 million this time round. Its total revenue grew 8% year-on-year to $82.4 million, and its recurring revenue grew by 4% to $78.6 million. The company also decreased operating expenditures.

Yet, the main growth story of the quarter was InterDigital’s phenomenal earnings numbers. The company was just about break-even in the previous year, but this time managed to smash analyst per share earnings expectations by $0.17, with a GAAP EPS of $0.18.

IDCC’s Chief Financial Officer, Rich Brezski, put this 1700% increase down to synergies from steadily rising revenues and reduced expense costs.

InterDigital’s more general business plan remains on track too. The lifeblood of the company lies in the success of its R&D and new product inventions, and its ability to defend its intellectual property through litigation if the need arises.

In this regard the firm is doing well: it generated 25% more 3GPP wireless-related inventions during the COVID period than the previous year; renewed its long-standing licence agreement with the multinational Sharp Corporation; and has made significant and positive progress in litigation with Xiaomi in courts in both India and Germany.

The company’s Price-to-cash flow is extremely low compared to the industry median at a multiple of only 12.13, and its year-on-year revenue growth also outstrips the wider sector average. InterDigital is in a great position right now, and should remain so for the foreseeable future.

[#1] Consolidated Water Co. Ltd. (CWCO)

For a company as stable and reliable as Consolidated Water, the idea of considerable earnings growth might not be the first thing that comes to mind. But despite declining retail sales, this is exactly what happened last quarter.

As a long-established provider of water services and solutions in the Caribbean and US, CWCO has traditionally been seen as a slow-growth value play in the desalination and wastewater facilities space.

The firm is well-positioned to turn global trends in water scarcity and rising population needs into tailwinds, and its solid value metrics – it has a very low Price-to-book ratio of 1.09, and a strong EV-to sales multiple of 1.97 – attest to this.

But in its most recent financial filings for Q1 2012, the company saw an earnings per share surprise of 300%, beating Wall Street predictions with a GAAP EPS of $0.08. Stranger still, perhaps, is that this followed a total revenue decline of 17.5% for the quarter year-on-year.

Consolidated Water was hit particularly hard by the coronavirus pandemic, but made up some of the shortfall from its retail business segment through its PERC Water operation in California.

Potential infrastructure contracts in both California and Arizona are on the horizon, and if the firm can maintain its momentum through planned new acquisitions, organic growth and other projects, another bumper earnings beat is surely on the cards.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.