In general, an aggressive portfolio has high allocation towards growth stocks. These are stocks from companies that are reporting robust revenue and earnings growth. However, even for a defensive portfolio, some allocation to growth stocks makes sense. While defensive stocks provide regular cash inflow, growth stocks are the key portfolio return catalysts.
Recently, growth stocks from the electric vehicle and renewable energy sector have corrected after making all-time highs. I believe that these corrections are healthy for the markets and also provides a good entry opportunity.
There are other growth stocks from across sectors that have remained resilient. Even at all-time highs. Let’s take a deeper look into these stocks.
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DKNG stock has been in a steady uptrend. With the company recently reporting strong fourth-quarter results for 2020, the stock trades at all-time highs. For the next few years, DKNG stock is among the top growth stocks to consider.
In terms of financial performance, DraftKings reported Q4, 2020 revenue of $322 million, which was higher by 146% on a year-on-year basis.
Further, for fiscal year 2020, the company reported revenue of $614 million. For the current year, the company has guided for revenue of $950 million (mid-range of guidance). This implies a year-over-year growth guidance of 54.7%. Clearly, the company is on a high growth trajectory and it’s not surprising that the stock is surging.
I further believe that strong top-line growth will sustain in the next few years. The reason is as follows – Draft King’s online sports betting is currently live in 12 states. It’s very likely that more states will legalize online gaming and sports betting. With each new market, the company’s revenue outlook will be revised on the upside.
Draft Kings did report an adjusted EBITDA loss of $396 million for 2020. However, I don’t see that as a concern for a high-growth company. Importantly, the company’s average revenue per monthly active payer was $51 in FY2020 as compared to $39 in 2019. As the monthly active players increase, the company is well positioned for strong cash flows in the coming years.
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ETSY stock is another name among growth stocks that continued to trend higher. In 2020, the stock surged over 300%. It seems that there is more juice in the rally. However, I do believe that fresh exposure to the stock can be considered on dips.
Of course, the company’s rally has been backed by stellar growth. Recently, Etsy reported Q4 2020 results and the numbers impressed the markets. For 2020, the company reported revenue growth of 110.9% and an adjusted EBITDA growth of 194.8%.
Further, for Q1 2021, the company has guided for revenue growth range of 125%-135% on a year-over-year basis. Etsy also expects adjusted EBITDA margin in the range of 32%-34%. It seems very likely that revenue growth for the current year will be over 100%.
It’s important to note that Etsy is making strong inroads in the international markets. In the U.K., the company reported gross merchandise sales (GMS) growth of 189% for 2020. In Germany, GMS growth was 109% for the same period.
With the pandemic accelerating e-commerce growth, Etsy has witnessed a sharp upside in active buyers and sellers. This growth is unlikely to be temporary as global presence expands.
From a financial perspective, the company’s free cash flow has accelerated significantly in 2020. Etsy has an asset-light business model and reported a cash balance of $1.7 billion as of Q4 2020. As free cash flow accelerates, the company can potentially utilize the cash buffer for dividends and share repurchase. Inorganic growth is also a possibility.
Overall, Etsy has a good business model and the company’s growth is likely to remain strong in the coming years. ETSY stock is worth considering on declines.
FIVN stock also makes it to my list of growth stocks with a strong outlook for the coming years. The markets have been discounting strong growth for the company and the stock trades at all-time-highs.
As an overview, Five9 is a provider of cloud contact center solutions. For Q4 2020, the company reported strong top-line growth of 39% to a record of $127.9 million. For the full year, the company’s revenue growth was 33%.
Another big positive factor is that as of Q4 2020, the company’s recurring revenue was 93% of the total revenue. This provides a clear cash flow visibility. In addition, the company’s international expansion is likely to be a key growth driver. In Q4 2020, the company’s international bookings doubled on a year-over-year basis.
Talking about international expansion, Five9 acquired Inference Solutions in October 2020. This has helped the company make inroads in to Australia. It’s likely that Five9 will continue to pursue opportunistic acquisitions to expand global presence.
In terms of cash flow visibility, the company reported adjusted EBITDA margin of 23% for Q4 2020. In the long-term, the company is targeting an adjusted EBITDA margin of 27%. As global clients increase and recurring revenues swell, the business is positioned to be a cash flow machine.
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PLL stock has surged over 600% in the past year and the rally has sustained with the stock hitting all-time-highs. Despite a recent dip in the stock, the rally can be explained by the fact that Piedmont Lithium is an emerging lithium chemicals company.
Estimates suggest that global lithium demand will more than double by 2024, backed by strong growth in the electric vehicle (EV) industry. A multi-year bull market for the EV industry also implies sustained demand for lithium.
Specifically, Piedmont Lithium is a supplier of lithium hydroxide, which is used in lithium-ion batteries. The company has a five-year binding agreement with Tesla (NASDAQ:TSLA). The agreement is at a fixed price, with first shipment expected in 2022-23. Going forward, the agreement will provide the company with a clear revenue and cash flow visibility.
An important point to note is that the company estimates the net present value of the lithium chemical plant at $1.1 billion. Even after the big rally, PLL stock trades at a market capitalization of $846 million. Clearly, there seems to be more potential for upside even if there is some intermediate correction.
Piedmont Lithium is also looking at expansion projects and any positive development on that front would imply valuation re-rating. Overall, PLL stock is a good way to benefit from the electric vehicle boom.
With the growing demand for lithium, LTHM stock is another name among growth stocks that has been in the limelight. The stock trades near 52-week highs and I believe that further upside is on the cards.
As an overview, Livent Corporation is a producer of high-quality finished lithium compounds. The company has manufacturing sites in U.S., U.K., India, China and Argentina. Therefore, with global presence, the company is well positioned to benefit from lithium demand growth.
In terms of business development, the company signed a “multi-year supply agreement with BMW Group to deliver both lithium hydroxide and carbonate.” The company expects volume production and sales to commence next year. This agreement is likely to be a revenue and earnings upside trigger.
Even for the current year, Livent Corporation expects top-line and EBITDA growth of 22% and 127% respectively. It’s very likely that revenue growth will accelerate significantly in the coming year. Therefore, LTHM stock does look attractive at current levels of $16.28.
It’s also worth noting that the demand-supply scenario remains tight for lithium. As the price of finished lithium compounds increases, the company is positioned to deliver expanding EBITDA margin and potentially higher cash flows.
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SONO stock is another quality name among growth stocks that continues to trend higher. The stock currently trades at $37.88 and I expect further upside. At a forward P/E of 37.3, SONO stock does not seem to be overvalued.
As a quick overview, Sonos is a provider of audio products in the United States, Europe and Asia Pacific. Last month, the company reported Q1, 2021 results and the numbers were stellar. Revenue was at $645.6 million, which was higher by 15% on a year-over-year basis. Further, adjusted EBITDA increased by 78% coupled with a 920 basis points expansion in EBITDA margin.
Also, the company’s free cash flow increased by 97% on a year-over-year basis to $203.2 million. This implies an annualized free cash flow of $800 million. I also like the fact that the company closed Q1, 2021 with a cash balance of $678 million and zero debt. This provides the company with strong financial headroom for growth and shareholder value creation.
It’s worth noting that the stock trades at a market capitalization of $4.5 billion and the free cash flow visibility for the year is $800 million. Without doubt, the stock is undervalued.
For the current year, the company has also raised the revenue and EBITDA guidance. If strong growth sustains, I will not be surprised if SONO stock continues to surge higher.
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WIX stock has increased 117% in the past year, and the outlook remains bullish.
For 2020, Wix.com reported strong revenue growth of 30% on a year-over-year basis. For the current year, the company expects revenue between $1,272 to $1,286 million. This would imply revenue growth of approximately 30%. As strong growth sustains along with potential increase in operating cash flows, WIX stock is likely to trend higher.
In terms of industry tailwinds, the novel coronavirus pandemic has accelerated growth in online business. Wix.com reported 31 million new registered users in 2020 coupled with one million net new subscriptions. It’s very likely that new subscriptions will continue to increase at a healthy pace in the next few years.
Another growth trigger for the company is geographic penetration. As of Q4, 2020, the company derived 57% revenue from North America and 26% from Europe. Revenue contribution from Latin America and Asia was just 17%. In the coming years, these regions are likely to contribute to a higher share of revenue.
Overall, WIX stock is another attractive name among growth stocks. However, it makes sense to wait for some correction in the stock after a big rally.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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