3 of the fastest growing stocks on the market today
Investors often focus on various valuation metrics to determine if a stock is a good buy opportunity. Evaluation measures can be useful, but the majority of them relate only to the past year. The irony is that long-term investors should look to the future. Three, five, or ten years into the future, retrospective evaluation metrics may be less useful than you might intuitively think.
This is why growth stocks are so attractive to investors who plan to patiently hold for years. With enough time, the best producers can multiply returns, making supposedly overvalued stocks look like good business in hindsight. It is therefore important to pay attention to growth stocks. And Digital turbine (NASDAQ: APPS), Interactive Platoon (NASDAQ: PTON), and Break (NYSE: SNAP) are three of the fastest growing stocks. Here’s why their income growth rates are so important to potential investors.
1. Digital turbine
Just over a year ago, Digital Turbine’s market cap was less than $ 1 billion. But CEO Bill Stone had visions of the company becoming what he calls a “unique new generation.” [advertising technology] ecosystem “to grab his share of what he believes to be a more than $ 300 billion addressable market opportunity. Over a year ago, he acquired a company called Mobile Posse to help build the ecosystem And in the past year, it acquired AdColony, Appreciate, and Fyber. Its market cap has now exceeded $ 7 billion, in part thanks to those acquisitions.
Here’s how quickly Digital Turbine’s business is growing: For fiscal 2020 (which ended in March 2020), the company generated nearly $ 139 million in revenue, an increase of 34 % year over year. For fiscal 2021, its revenue jumped to nearly $ 314 million, up 126%. And for fiscal 2022, management thinks it can hit $ 1 billion – that’s almost eight times what his income was just two years ago.
Digital Turbine helps developers download their apps to mobile devices by partnering with wireless carriers like T-Mobile United States and AT&T. Because there are relatively few operators, it puts Digital Turbine at risk if one of them chooses to no longer work with the company – in prospect, 26% and 23% of the company’s revenue. fiscal year 2021 came from mobile devices on the T-Mobile and AT&T networks. , respectively. In addition, most of its business is done on Google’s Android platform, which is part of Alphabet. And with Google’s recent shift in its advertising business, it may start to create something that encroaches on the Digital Turbine space.
Finally, some could see an execution risk with Digital Turbine given the number of significant acquisitions it has recently made. It is difficult to integrate everything and make the combined business worth more than the sum of its parts. That said, it is trading at around seven times its sales for fiscal 2022 and just 35 times its profit forecast. For a growth stock, this is a relatively reasonable value that will pay off if Digital Turbine runs.
But run it must. When acquiring Fyber in May, Stone said, “We believe we now have all the essentials” to achieve the company’s vision. Therefore, this next year will be crucial in proving whether the management strategy is the right one.
Unlike Digital Turbine, Peloton hasn’t grown much through acquisitions so far. But its revenue has grown at a compound annual growth rate (CAGR) greater than 100% since its inception. Revenue for fiscal 2020 (which ended in June) increased about 100% year-over-year to $ 1.8 billion. For fiscal 2021, management now forecasts revenue of $ 4 billion, which will be up 122% from 2020. This forecast has been revised up several times due to continued incredible demand. , and even takes into account the negative impact of $ 75 million from the recall of its treadmills.
Peloton’s impressive revenue growth deserves investor attention as the profit margin of its subscription business increases simultaneously. The company has a two-sided business: it sells training equipment for a one-time sale and charges an ongoing monthly subscription for connected features. In the first three quarters of fiscal 2021, Peloton’s gross margin for its subscription service was 62%, compared to 57% in the comparable period last year.
In the long term, Peloton management estimates that the gross margin of its subscription business will be over 70%. And over time, if the company can continue to build customer loyalty as in the past, it seems likely that the subscription business will represent a larger share of the revenue mix, thereby increasing the overall margin. In addition, the subscription business has less expense related to the bottom line. For example, you don’t need to advertise it (people who own a Platoon are already familiar with the service), so sales and marketing expenses are less.
Peloton ended its final quarter with over 2 million active subscriptions. In the long term, management wants 100 million. It sounds like a lofty, crazy goal, and it just might be. But getting to a fraction of it would take the company’s subscription business to huge heights and make it a much more profitable business as it matures. Therefore, this is a growth stock to at least keep on your radar.
Snap, the parent company of the popular social platform Snapchat, is growing rapidly and steadily accelerating. The company’s annual revenue grew 43%, 45%, and 46% year-over-year in 2018, 2019 and 2020, respectively. However, for the first quarter of 2021, the revenue increased by a further 66% compared to the same quarter of last year. And that’s driving 81% to 85% year-over-year revenue growth for the second quarter. Therefore, it looks like 2021 will be Snap’s third consecutive year of accelerating revenue growth – a remarkable achievement for a multi-billion dollar company like this.
Snap’s growth is much slower than that of Digital Turbine and Peloton. But he makes this list by how long he might be able to sustain this stellar growth. During its presentation at Investor Day in April, management said it expected annual revenue growth of more than 50% for the “several” years to come.
For what it’s worth, Snap’s outlook looks reasonable to me. Consider that Snap has an engaged and growing user base among Gen Z, a large demographic whose purchasing power is only increasing. And companies are shifting their advertising investments to digital channels like Snap, which deliver measurable results. This leads to more competition for ad space, which increases prices and leads to increased revenue for Snap.
However, I am really watching Snap now because of its growth in results. In the first quarter, the company posted positive free cash flow for the first time since its IPO in 2017, and its operating cash flow was $ 137 million, an increase of more than 20 times compared to the meager $ 6 million it had in the same quarter last year. In short, it looks like Snap has finally made it to profitability, which means continued revenue growth should deliver stellar cash flow for the foreseeable future.
This cash flow will give Snap a lot of options going forward. Specifically, the company sees a great opportunity in augmented reality (AR), making several major acquisitions in recent months. According to Reportlinker.com, the AR market was valued at around $ 49 billion in 2020, but is expected to reach nearly $ 300 billion by 2025. Therefore, it appears that Snap has indeed found a place worthy of reinvesting. its cash flow to develop its business for the long term.
Takeaway for investors
For investors looking for growth stocks, Peloton and Snap are particularly informative stories. Income growth is important, yes. But are margins also increasing (like Peloton’s)? Otherwise, investors would have to dig deeper – this might not be a great opportunity in the long run. Also, if the business is booming, will the growing company have a place to reinvest its cash flow for more growth (like Snap)? Growing margins and a place to invest future cash flow are two important aspects of any growth investing, and these two companies offer that to investors today.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.