Growth stocks
There's a constant debate in the market about which stocks offer better returns: growth stocks or value stocks . On one side are investors interested in rapid, high growth potential, and on the other, those looking for undervalued stocks. In this article, we'll explain the key characteristics of growth stocks and introduce some stocks that offer promising potential to watch in the future.
What are growth stocks?
Growth stocks are typically companies that seek rapid scale by expanding product lines, improving operational efficiencies, and achieving leadership positions. While these companies can be found in every sector, most belong to industries where technology enables 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 companies, including Nasdaq-listed technology stocks, and have typically outperformed the broader market. They often offer above-average returns, as evidenced by growth benchmark indices such as the S&P 500 Growth Index over the years. However, a growth company's share price and valuation are typically high relative to its earnings and revenue, and it may not have been profitable in the past.
Investors buy growth stocks in anticipation of the companies' success. Most blue-chip stocks began as growth stocks but have since achieved a more consistent growth rate.
How risky are growth stocks?
Unlike value stocks, which tend to be cyclical , growth stocks can be more consistent. However, growth stocks may be young companies trying to achieve 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 the risk of short-term losses. If a company doesn't achieve the major successes investors hope for, it can have a dramatic impact on its share price.
Fast-growing companies
Below is a list of 14 growth stocks available to trade as CFDs on our Next Generation trading platform , ranked by the percentage growth in annual revenue in the respective company's last fiscal year. These figures are as of February 2022.
Zoom [ZM]
Market capitalisation: $38 billion
Price-earnings ratio (P/E): 34.4
Revenue: 326% year-on-year to $2.7 billionThe coronavirus pandemic turned Zoom into a household name as many people suddenly began working from home. Revenue increased 355% in the three months ending July 2020. The company closed fiscal year 2021 with net income of $672 million, up from $22 million in the same period last year. 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 capitalisation: $3.17 billion
P/E ratio: N/A
Sales: 194% year-on-year to $31 millionThe financial position of clinical-stage biopharmaceutical companies often fluctuates depending on research breakthroughs and product demand. Drug development can be expensive, and it can sometimes take years to generate revenue. Fate is currently developing promising cellular immunotherapies for cancer patients and could become one of the dominant companies in this emerging therapeutics market. In the first quarter of 2021, the company reported revenue of $11.1 million.
Square [SQ]
Market capitalisation: $56.5 billion
P/E ratio: 98.7
Revenue: 101% year-on-year to $9.5 billion
Mobile payments provider Square is benefiting from people's shift away from cash in favour of digital currencies and transactions. Its Cash App added 12 million users in fiscal year 2020, up from 24 million at the end of 2019. The wallet, used for sending money and buying and selling cryptocurrencies, generated $4.57 billion in bitcoin sales. Cash App generated gross profit of $1.23 billion in 2020, a 168% increase over the previous year and accounting for 45% of the company's total gross profit of $2.73 billion.
GrowGeneration [GRWG]
Market capitalisation: $507 million
P/E ratio: 28.7
Sales: 143% year-on-year to $193 million
The hydroponic supplies provider was among the top cannabis stocks in 2020, as retail sales grew 63% and e-commerce sales grew 123%. The company has expanded its retail presence through the acquisition of several smaller companies in the hydroponic and organic gardening markets. GrowGeneration expects fiscal 2021 revenue growth of 115% to 122% year-over-year, from $193 million to $415 million to $430 million.
Etsy [ETSY]
Market capitalisation: $16.1 billion
P/E ratio: 39.0
Revenue: 111% year-on-year to $1.7 billion
The online marketplace for handmade crafts is a beneficiary of the stay-at-home economy. Habitual shoppers, defined as those who have shopped on six or more days in the past 12 months and spent $200, saw a record year-over-year increase of 205% through May 5, 2021. While sales growth may slow in the short term as consumer habits change after the pandemic, Etsy is positioning itself as a platform for anyone looking to purchase handmade items from independent sellers.
MercadoLibre [MELI]
Market capitalisation: $47.3 billion
P/E ratio: 641.6
Revenue: 73% year-on-year to $3.9 billion
The Argentine e-commerce and digital payments giant had a ground-breaking year in 2020, posting record growth. Despite a net loss of $700,000 for the fiscal year, ongoing investments in warehousing, storage capacity, and logistics networks should position the company to capitalize on the ever-expanding e-commerce opportunities in Latin America.
Pinterest [PINS]
Market capitalisation: $15.7 billion
P/E ratio: 54.3
Revenue: 48% year-on-year to $1.6 billion
The social network platform added 100 million new monthly users in fiscal year 2020, bringing its total to more than 450 million. Revenue grew 39% in the US and 129% outside the US. International revenue is expected to be the focus of future growth. Pinterest expanded its integration with Shopify to 27 countries in April 2021, enabling 1.7 million merchants to list products.
Advanced Micro Devices [AMD]
Market capitalisation: $185.2 billion
P/E ratio: 43.65
Revenue: 45% year-on-year to $9.7 billion
Advanced Micro Devices' superior product portfolio has enabled the semiconductor manufacturer to break Intel's dominance in central processing units (CPUs). In the first quarter of fiscal year 2021, AMD's market share in desktop CPUs exceeded Intel's for the first time since 2006. For the full fiscal year, revenue is forecast to increase 50% over 2020, with robust growth in CPU and gaming hardware sales.
Zscaler [ZS]
Market capitalisation: $35.7 billion
P/E ratio: N/A
Revenue: 42% year-on-year to $431 millionThe cloud-based cybersecurity company has benefited greatly from the pandemic, which accelerated digital transformation, while increasing cyber threats and attacks have increased demand for security solutions. The GAAP net loss for fiscal year 2020 was $114 million, compared to a loss of $35.3 million in 2019. The company has pushed back its target of achieving a non-GAAP operating margin of 20% to 22% to fiscal year 2024. With several consecutive quarters of annual revenue growth since its 2018 IPO, future earnings could be strong.
Alibaba [BABA]
Market capitalisation: $328.9 billion
P/E ratio: 18.1
Revenue: 41% year-on-year to $109.4 billionThe Chinese e-commerce giant is experiencing strong growth in its cloud computing business—a positive sign for the future. Alibaba Cloud's growth outpaced that of rivals Amazon and Microsoft for parts of fiscal year 2021, and the company posted its first profit in the third quarter. As of June 2021, the company held a 40% share of the Chinese cloud computing market.
Tesla [TSLA]
Market capitalisation: $885 billion
P/E ratio: 179.11
Revenue: 28% year-on-year to $31.5 billionThe electric vehicle manufacturer relies heavily on the sale of carbon tax credits to achieve profitability. Revenue from the sale of carbon credits totaled $1.58 billion in 2020, and Tesla posted a net profit of $721 million. A decline in credit sales could impact the Palo Alto-based company's bottom line, but vehicle production and delivery figures continue to exceed Wall Street expectations.
Netflix [NFLX]
Market capitalisation: $173.7 billion
P/E ratio: 34.41
Revenue: 24% year-on-year to $24.9 billion
The streaming service added 36.57 million subscribers in 2020, up from 27.83 million in 2019, bringing its total to 203.7 million. Despite years of cash flow constraints and ever-increasing spending on new and original content, Netflix expects to be cash flow positive every year starting in 2022.
Crocs [CROX]
Market capitalisation: $4.62 billion
P/E ratio: 7.20
Revenue: 12.6% year-on-year to $1.3 billion
Multicolored rubber clogs have made a fashionable comeback, and the apparel company is experiencing unprecedented demand for its shoes as more people seek comfortable footwear. Although sales in the Asia-Pacific region declined 19.2% year-on-year in fiscal 2020, sales in the Americas grew 35.7%, and Asia was identified as the larger long-term growth opportunity. In the first quarter of fiscal 2021, sales in this region increased 20%.
Papa John's [PZZA]
Market capitalisation: $4.15 billion
P/E ratio: N/A
Revenue: 12% year-on-year to $1.8 billion.
Sales growth declined in 2018 and 2019, but the pizza chain has reinvented itself thanks to a growth strategy focused on product innovation, development, and operational improvements. The Epic stuffed crust has been a huge success since its launch in late 2020. Due to demand for its pizzas, the company has hired numerous new employees in the US and expects "historic levels" of growth in 2021.
What about growth ETFs?
Trading exchange-traded funds (ETFs) can be an effective way to participate in groundbreaking trends, new technologies, and innovations in a specific sector or industry without putting all your eggs in one basket. Growth exchange-traded funds allow you to speculate on a range of growth stocks with a single position. These include ETFs from the following growth areas:Companies that manufacture electric vehicles as well as those that research and develop the underlying technologies.Companies that benefit from the adoption of telemedicine, which has accelerated since the pandemic.Companies that develop and publish video games (gaming stocks), as well as companies that enable the streaming and distribution of gaming content.Online retail and e-commerce companies.
Which stock markets have high growth potential?
Taiwan
The Taiwan Stock Exchange (TSWE) recorded record trading volume at the beginning of 2021. While the global sell-off in the technology sector may lead to a short-term shift toward value, the exchange remains tech-heavy. Semiconductor and electronics companies listed there, in particular, are said to outperform the market over the long term. One example of a Taiwanese company that meets the above criteria is Taiwan Semiconductor Manufacturing Company [TSMC] .
Argentina
Argentina's economy is expected to grow for the first time since 2017 in 2021, after shrinking by almost 10% the previous year. The e-commerce boom in Argentina was also larger than anywhere else in the world in 2020, growing 79% year-on-year. Companies in the e-commerce, IT, and software development sectors are listed on the Argentine stock exchange (MERVAL). One example of an Argentine company that meets the above criteria is Globant [GLOB] .
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.
