There is a reason why equity investors are forever on the lookout for growth stocks. Companies that are able to consistently multiply their revenue and earnings generally tend to outperform the broader market over time.
However, these stocks trade at a premium which makes them vulnerable in a bear market. Yet, growth stocks remain the best investment vehicle for people who are looking to accelerate their retirement plans and have a long-term horizon.
Here, we take a look at three such growth stocks that have gained significantly in 2020 but should continue to rally in 2021 and the upcoming decade.
A programmatic advertising giant
The first growth stock on the list is The Trade Desk (TTD), a leader in the programmatic ad space. Shares of TTD have surged a staggering 260% year-to-date and are up 3,273% since its IPO in late 2016. TTD’s forward price-to-sales multiple is 54.2x.
Despite lower digital advertising budgets for enterprises in 2020 amid the pandemic, TTD has beaten Wall Street estimates in the last three quarters to trade at a higher valuation. Now as the global economy recovers in the next 12-months, TTD is well poised for accelerating revenue growth.
The shift towards online shopping and streaming services remain long-term revenue drivers for TTD. The rise in adoption of connected TV is a huge market opportunity for The Trade Desk. Further, advertising is one of the key engines of economic growth and TTD’s customers understand customized ad campaigns can go a long way in increasing sales.
In Q3, the company’s revenue was up 32% year-over-year at $216 million, and net income rose over 100% to $41 million. Ad sales from the CTV sales were up 100% as well.
A remote work enabler
One of the top trends in 2020 was the shift towards remote work. The COVID-19 pandemic acted as a tailwind for remote work enabling companies such as Okta (OKTA). Shares of Okta have gained 122% in 2020 and are up almost 1,000% since its IPO, three years back. OKTA’s forward price to sales multiple is 37.7x.
Okta is a cloud-based enterprise-facing identity management platform that makes it easier for clients to secure their suite of remote-work applications. In fiscal 2021, analysts expect Okta sales to surge 40% year-over-year to over $822 million. While this growth will decelerate in 2022, revenue is forecast to grow by 30% to $1.07 billion next fiscal year.
Okta’s subscription sales account for 95% of total revenue allowing it to generate stable cash flows across economic cycles. In fiscal Q3, its sales were up 42% at $217.4 million while adjusted earnings per share stood at $0.04, compared with a loss per share of $0.03.
The company’s free cash flow also surged by $9.2 million year-over-year to $41.6 million.
A streaming platform for television
Roku (ROKU) is another stock that should be on the radar of most growth investors. The stock has surged 140% year-to-date and is up over 1,100% since it went public in late 2017. Roku’s forward price-to-sales multiple is 23.5x.
Roku is one of the largest streaming platforms in the world and leads this market in the U.S. It has two primary business segments which are Player and Platform businesses. It ended Q3 with 46 million active accounts, a growth of 43% year-over-year. Roku’s Platform business aims to monetize the company’s rising user base and its average revenue per user has risen from $17.95 in 2018 to $23.14 in 2019 and $27 in Q3 of 2020.
Its digital ad revenue accounts for almost 70% of total sales. In Q3, sales soared by an impressive 73% to $451.7 million due to an increase in digital ads and subscription sales. The number of streaming hours also rose 54% to 14.8 billion in this period, showing strong user engagement.
The final takeaway
The Trade Desk, Okta, and Roku are trading at high valuations and all three stocks will be vulnerable in a market sell-off. However, every market correction should be viewed as a buying opportunity for each of these companies, given the expanding addressable markets, easily scalable businesses, and enviable growth metrics.
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TTD shares were trading at $916.26 per share on Wednesday morning, down $16.87 (-1.81%). Year-to-date, TTD has gained 252.71%, versus a 16.57% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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