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What are growth stocks and which can I watch?

There is an ongoing debate in the market as to which stocks will offer better returns: growth stocks or value stocks. On one side are investors interesting in rapid growth potential and on the other, those that believe in seeking out undervalued stocks. In this article, we explain the main characteristics of growth stocks and shortlist some that show promising potential to watch in the future.

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What are growth stocks?

Typically, growth stocks are companies with ambitions to quickly scale by expanding product lines, improving operational efficiency, and achieving first mover advantage. Although these companies can be found in any sector, most are in industries where technology is enabling innovation and the delivery of new services. These industries include cloud computing, e-commerce, financial services and healthcare.

Growth stocks can be both small and large-cap​, including big tech stocks listed on the Nasdaq exchange, and have tended to outpace the broader market. They often provide better-than-average returns on investments, which has been demonstrated by growth benchmark indices over the years, such as the S&P 500 Growth Index. However, a growth company’s share price and valuation are usually high relative to its earnings and revenue, and it may not have a history of profitability.

Investors may buy into growth stocks with the expectation that the companies will go on to achieve big things. Most blue-chip stocks​ started out as growth stocks but have since achieved a steadier rate of growth.

How risky are growth stocks?

Unlike value stocks, which tend to be cyclical stocks​ in nature, growth stocks can be more evergreen. However, growth stocks can be young upstarts, trying to do something big or whose products are still in the research and development phase. There’s no guarantee of immediate success or profit and there’s always a risk of losses in the short-term. If a company fails to achieve the big things that investors are hoping it will, then this can have a dramatic impact on the share price.

Top-performing growth companies

Below is a list of 15 top-performing growth stocks that are available to trade on via spread bets or CFDs on our Next Generation trading platform​, in order of year-over-year annual revenue percentage growth for each company’s most recent fiscal year. These figures are accurate as of June 2021.

Zoom [ZM]

Market cap: $111bn
PE ratio: 129.93
Revenue: 326% year-on-year to $2.7bn

The coronavirus pandemic made Zoom a household name as people embraced remote working. In the three months before the end of July 2020, revenue soared 355%. It ended fiscal 2021 with a net profit of $672m, up from $22m in the year-ago period. The shift to remote and flexible working has been a key driver of growth for the company. However, there are concerns about how the company will fare in a post-pandemic world.

Fate Therapeutics [FATE]

Market cap: $7.6bn
PE ratio: N/A
Revenue: 194% year-on-year to $31m

Clinical-stage biopharmaceutical company financials will often oscillate depending on research breakthroughs and demand for products. Developing drugs can be expensive and it can sometimes be years before they bring in revenue. Fate are currently developing first-in-class cellular immunotherapies for patients with cancer and are expected to be a dominant company in the emerging therapy market. In Q1 of 2021, the company posted a revenue of $11.1m.

Square [SQ]

Market cap: $101bn
PE ratio: 328.25
Revenue: 101% year-on-year to $9.5bn

Mobile payments processor Square is profiting from people abandoning cash in favour of digital currencies and transactions. Its Cash App added 12 million new users in fiscal 2020, up from 24 million at the end of 2019. The digital wallet, used for sending money and buying and selling cryptocurrencies, brought in $4.57bn through Bitcoin sales. Cash App generated $1.23bn in gross profit in 2020, up 168% year-over-year, accounting for 45% of the company’s total gross profit of $2.73bn. For this reason, it is a prominent crypto stock​.

GrowGeneration [GRWG]

Market cap: $2.3bn
PE ratio: 156.07
Revenue: 143% year-on-year to $193m

The hydroponic equipment supplier emerged as one of the top cannabis stocks in 2020, as same-store sales grew by 63% and e-commerce sales by 123%. The company has been expanding its retail presence by acquiring several smaller players in the hydroponics and organic gardening market. It’s expecting revenue for fiscal 2021 to grow by 115%-122% year-over-year from $193m to between $415m and $430m.

Etsy [ETSY]

Market cap: $21.5bn
PE ratio: 48.20
Revenue: 111% year-on-year to $1.7bn

The online marketplace for home-made crafts has been a beneficiary of the stay-at-home economy. Habitual buyers, defined as those who’ve made purchases on six days or more and spent $200 in the past 12 months, grew a record 205% year-over-year through to 5 May 2021. Although revenue growth could slow in the short-term as post-pandemic consumer spending habits change, Etsy is positioning itself as the go-to platform for those who want to buy hand-made items from independent traders.

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MercadoLibre [MELI]

Market cap: $73.1bn
PE ratio: 2897.33
Revenue: 73% year-on-year to $3.9bn

The Argentine e-commerce and digital payments giant had a breakout year in 2020, reporting record growth. Despite a net loss of $700,000 for the fiscal year, down 99.5% from fiscal 2019, ongoing investments in its warehousing, inventory storage capacity and logistics networks should enable it to capitalise on ever-expanding e-commerce opportunities in Latin America.

Pinterest [PINS]

Market cap: $46.5bn
PE ratio: 228.94
Revenue: 48% year-on-year to $1.6bn

The social network platform added 100m new monthly users in fiscal 2020, taking the total to more than 450m. Revenue was up 39% in the US, but 129% outside the US. International revenue is expected to be the main focus for future growth. Pinterest expanded its integration with Shopify to 27 countries in April 2021, allowing 1.7m merchants to place products.

Zynga [ZNGA]

Market cap: $11.3bn
PE ratio: 143.86
Revenue: 49% year-on-year to $1.97bn

The gaming company has seen strong demand for both advertising and its games, with bookings for fiscal 2020 totalling $2.27bn, up 45% year-over-year. Bookings for fiscal 2021 are expected to be around $2.9bn. Crucial to the company's growth strategy is its on-going acquisition spree, including the $250m purchase of Chartboost, a mobile advertising and monetisation platform.

Advanced Micro Devices [AMD]

Market cap: $102bn
PE ratio: 35.51
Revenue: 45% year-on-year to $9.7bn

Advanced Micro Devices’ superior product portfolio has allowed the semiconductor company to chip away at Intel’s central processing unit (CPU) dominance. In the first quarter of fiscal 2021, AMD’s market share of desktop CPUs was greater than Intel’s for the first time since 2006. Revenue for the full fiscal year is forecast to be 50% up from 2020, with robust growth in CPU and gaming hardware sales.

Zscaler [ZS]

Market cap: $29.7bn
PE ratio: N/A
Revenue: 42% year-on-year to $431m

The cloud-based cybersecurity company​ has greatly benefited from the pandemic accelerating digital transformation, while increased cyber threats and attacks have driven demand for security solutions. GAAP net loss for fiscal 2020 was $114m versus a loss of $35.3m in 2019, and the company has pushed back its target of achieving a non-GAAP operating margin range of 20% to 22% to fiscal 2024. With several consecutive quarters of year-over-year sales growth since its 2018 IPO, future revenue could be strong.

Alibaba [BABA]

Market cap: $576bn
PE ratio: 24.87
Revenue: 41% year-on-year to $109.4bn

China’s ecommerce giant is seeing strength in its cloud computing business – a positive sign for the future. Alibaba Cloud’s growth outpaced rivals Amazon and Microsoft during parts of its fiscal 2021 and it achieved its first profit in the third quarter. As of June 2021, the company had a 40% share of China’s cloud computing market.

Tesla [TSLA]

Market cap: $593bn
PE ratio: 617.69
Revenue: 28% year-on-year to $31.5bn

The electric vehicle manufacturer is heavily dependent on selling carbon emission tax credits to achieve its profitability. Credit revenue was $1.58bn in 2020 and the company reported a net profit of $721m. A fall in credit sales could impact the Palo Alto company’s net income, but vehicle production and delivery numbers continue to surpass Wall Street expectations.

Netflix [NFLX]

Market cap: $222bn
PE ratio: 60.65
Revenue: 24% year-on-year to $24.9bn

The streaming service​ added 36.57m subscribers in 2020, up from 27.83m in 2019, taking the total to 203.7m. Despite years of cash burning and an ever-growing expenditure on new and original content, the company is expecting its operations to generate positive cash flow every year from 2022 onwards.

Crocs [CROX]

Market cap: $6.9bn
PE ratio: 18.14
Revenue: 12.6% year-on-year to $1.3bn

Multicoloured rubber clogs made a fashion comeback and the apparel company is seeing an unprecedented demand for its shoes as more people seek comfortable footwear. Although fiscal 2020 sales in the Asia Pacific region fell 19.2% year-over-year, compared to a 35.7% increase in the Americas, Asia has been identified as the greater long-term growth opportunity. The region’s revenue grew 20% in the first quarter of fiscal 2021.

Papa John’s [PZZA]

Market cap: $3.7bn
PE ratio: 52.86
Revenue: 12% year-on-year to $1.8bn

Revenue growth was in decline during 2018 and 2019, but the pizza chain has reinvented itself thanks to a growth strategy focused on product innovation, development and improving operations. Epic stuffed crust has been a huge success since it was introduced at the end of 2020. Demand for its pizzas has seen the company go on a hiring spree in the US and it’s anticipating ‘historic levels’ of growth in 2021.

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What about growth ETFs?

ETF trading​ can be an effective way to gain exposure to cutting-edge trends, new technologies and innovations in a particular sector or industry, without putting all your eggs in one basket. Growth exchange-traded funds​ allow to speculate on a number of growth stocks using one singular position, including the following that we offer on our platform below:

Global X Autonomous & Electric Vehicle ETF [DRIV]

This ETF tracks companies producing EVs, as well as those researching and developing the underlying technologies.

Global X Telemedicine & Digital Health ETF [EDOC]

This fund focuses on companies that are benefitting from adoption of telemedicine, which has accelerated since the pandemic.

Global X Video Games & Esports ETF [HERU]

This ETF invests in companies that develop and publish video games (gaming stocks), as well as those that are facilitating the streaming and distribution of gaming content.

ProShares Long Online/Short Stores ETF [CLIX]

This fund is long on online retail and ecommerce, while short on traditional, brick-and-mortar retail players at the same time.

Which countries’ stock markets have high growth exposure?

Taiwan

The Taiwan Stock Exchange (TSWE) saw record trading volumes in the early part of 2021. Although global tech sell-offs may mean short-term shifts to value, the exchange remains tech-heavy. In particular, semiconductor and electronics companies listed there are touted to outperform the market in the long term. An example of a Taiwanese company that meets the above mentioned criteria is Taiwan Semiconductor Manufacturing Company [TSMC]​.

Argentina

Argentina’s economy is expected to grow in 2021 for the first time since 2017, having contracted almost 10% in the year prior. The e-commerce boom was also bigger in the country than anywhere else in the world during 2020, growing 79% year-over-year. The Argentina stock exchange (MERVAL) lists companies in the e-commerce, IT and software development sectors. An example of an Argentinian company that meets the above mentioned criteria is Globant [GLOB]​.

Where can I learn more about emerging growth sectors?

Our spin-off Opto​ website provides insight and analysis on themes from cannabis to China tech to lithium. Subscribe to the Opto newsletter to stay on top of the biggest trends. There’s also guidance from market leaders and industry experts.

FAQS

What’s the difference between growth and value stocks?

Whereas growth stocks can be “expensive” on a price-to-earnings basis, reflecting a companies’ strong growth, value stocks are seen as “cheap”, trading at a discount relative to their fundamentals, and have a lower price-to-earnings ratio. Value stocks also tend to have a high dividend yield, making them an ideal way to generate passive income. On the other hand, growth stocks offer a low-to-no dividend as companies will often reinvest earnings to continue to grow their sales and revenue. Learn more about finding undervalued stocks.

What’s the best way to identify growth stocks?

When researching the top growth stocks to trade, the first thing to consider is the equity themes and sectors that are likely to see significant growth in a post-pandemic world. These could include healthcare innovation, clean energy and e-commerce. Once you’ve chosen a particular theme or sector, it’s then worth comparing the financials of competitors within the space. Read more about thematic investing.

Why can growth stocks be long duration?

“Long duration” is a term borrowed from the bond market that means an asset has a high sensitivity to rising interest rates. Growth stocks are typically seen as “long duration” because they are more sensitive to tightening monetary conditions due to their continued need for funding to feed their growth. Consequently, as the cost of their borrowing/funding increases, this dents their ability to grow (and in turn their stop price).

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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