There are a number of ways to invest. For investors looking to get the best returns—as long as they don’t mind a little risk—growth stocks can be a great way to meet your investing needs.
The best part about an investment in growth stocks, or companies that are seeing rapid growth in their earnings, sales, and cash flow, is that they can massively beat the stock market average over time. That makes it a great counterweight to the value stocks, dividend stocks, or other assets in your model portfolio that have slower, steadier characteristics.
While the space can be fast-paced and a bit risky, investors who look for great growth stock can find them in a number of industries and market caps. We’ve identified 10 of the best growth stocks right now:
Growth Stock #1: The Trade Desk (TTD)
Marketing and advertising are crucial for a company’s success. Today, most companies are adapting to an ad environment that’s a mix of real-world and digital. The Trade Desk covers those digital needs, with a cloud-based platform for data-driven digital campaigns.
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This allows brands to more accurately reach potential customers, customize messages depending on the location being advertised, and reach more people than other media-buying platforms.
It’s no surprise that with digital trends still on the rise, The Trade Desk has surged 80 percent in the past year. But the real story is in the company’s earnings. Earnings growth has come in at a staggering 137 percent with no signs of slowing down.
Meanwhile, the growth company has $445 million in cash on its balance sheet, against $370 million in debt. That’s the kind of balance sheet even a value investor could love, and it’s a huge competitive advantage over other tech companies that aren’t as cash rich.
With a market capitalization of only $20 billion right now, this is a company that could see its shares explode higher in the years to come as it continues to grow into this fast-growing space, increasing its market share along the way.
Growth Stock #2: Salesforce (CRM)
Another cloud-based software company, Salesforce provides services such as customer relationship management, including collaboration, sales, automation, and other customer support needs. That’s a nice differentiation from The Trade Desk. TTD’s operations are more focused toward the customer, while Salesforce has cloud services focused on back-office needs.
The services can be bought at once, or sold on a recurring revenue model.
The company also has developed contact tracing technology, making it the perfect coronavirus stock play for the coming year.
Still in its high growth stage, the company still isn’t making much money — but it has been growing its operations like gangbusters. Revenues grew 30 percent in the first quarter of 2020. Despite economic headwinds, Salesforce is primed to benefit from rising work-from-home and other remote-working trends likely to continue to play out.
Most importantly, the company’s core subscription business saw annual revenues rise 31 percent, and professional services were up 20 percent. These are all high-margin items.
Already a sizeable company, the considerable growth could make this a trillion-dollar company by valuation in just a few short years.
Growth Stock #3: Dropbox (DBX)
Dropbox has been a publicly-traded company since 2018. Offering both paid and complimentary software, Dropbox provides a collaboration platform. This allows companies to send and share large data files and otherwise work together while working apart.
This is another winner in the current shift towards work-from-home trends that should continue to see some solid growth over time. This is also another company that’s just near profitability but isn’t quite there yet.
But with revenues up 18 percent in the past year, and with the company adding more functionality for paid subscribers—who often upgrade from the free version—there’s a lot of upside potential here as well.
Unlike a number of growth names, this one hasn’t fared too well in the past year, with a 13 percent drop in stock price. That makes it a better bargain than some of the other tech names that have already had a big run up.
Growth Stock #4: Square (SQ)
Square (SQ), a payment processing company, has some tremendous long-term growth in the years ahead. And investors have just started to notice, with the share price now surging to all-time highs.
The company provides point-of-sale software and hardware to make selling easier between buyers and sellers. Their technology includes magnetic stripe cards, contactless chip, and a variety of other payment service solutions. They’re also working on Cash App, designed to transfer cash between parties at a lower cost than traditional banks.
Payment processing is a small part of doing business outside the realm of cash. The space has been dominated by credit cards for generations, and companies like Square are able to break up that oligopoly. Square aims to provide those services at a far lower cost, making it a disruptor for the space.
That’s why this is a play that could provide massive growth to owners over the next few years as Square increases its miniscule market share. Today’s buyers are foregoing a dividend, but they’re likely to more than make up for that now with this growth stock.
Growth Stock #5: Pinterest (PINS)
Describing itself as a “virtual discovery engine,” Pinterest (PINS) isn’t quite a social media company like Facebook or a search engine like Google. Rather, it’s tried to take the best elements of both. That’s created a unique niche in the market with no real competition. It can continue to grow out that niche in the years ahead, likely mimicking the returns that Google and Facebook have had along the way.
Conceptually, the idea sounded good. But ever since the company went public in 2019, shares haven’t performed too well. They’re down about one-third from their initial public offering price on a stock exchange.
Yet this is the kind of trend that also occurred in shares of Facebook when it first went public. Shares subsequently more than quadrupled from its IPO price as it got its act together and focused on generating revenue.
That’s a trend that should play out here. Pinterest’s visual-heavy nature is likely to keep subscribers on pages for a long time, which provides some big opportunities for advertisers. That should allow the company to become a consistently profitable operation in time.
Given the company’s size, as soon as it starts to look successful, it may end up getting gobbled up by a bigger name in the tech space. So it’s possible this is a great long-term play… you just may end up with shares of Google or another big tech name as a result.
Growth Stock #6: Adobe (ADBE)
Best known for its Acrobat Reader for viewing PDF files, Adobe has greatly expanded in recent years. The company has a digital media segment, a creative cloud and digital experience segment to meet various business needs.
This includes everything from web application and development to publishing and social marketing and web analytics. That’s a powerful suite of infrastructure needed for the economy’s current challenges.
Products can be offered as one-off sales, or on a recurring, subscription revenue basis, which provides consistent income to the company.
And as a major established player already, the company is both growing quickly and profitable. Earnings surged 73 percent in the past year. That’s tremendous growth. And the company sports a 31 percent profit margin. While shares may sound pricey at 45 times forward earnings, they’re not that expensive relative to the current and potential growth the company has been sporting.
Growth Stock #7: Marvell Technology (MRVL)
This looks like one of the more attractive plays in the semiconductor space right now. Marvell provides integrated circuits for signal processing, as well as ethernet solutions and products like hard drives and solid-state drives.
While this kind of tech still has to be physically processed, unlike today’s software that can be downloaded from anywhere, that still presents an incredibly profitable opportunity for investors. While earnings growth has been flat over the past year, making for the slowest growth play on our list, the company’s ongoing iteration of new products tends to cancel out slow growth with explosive growth in new products.
And with a 55 percent profit margin on what it does sell, and with shares trading at 15 times earnings, it’s an inexpensive play even if the growth rates don’t move significantly higher from here. That makes this a value play right now with some big growth potential in the years ahead.
What Stocks are Considered Growth Stocks?
Any company that is expected to grow its operations—whether in terms of sales, in terms of revenue growth, in terms of having a new product—is a growth stock. These are all easily-found metrics that can be run through any stock screener, and from looking at the top holdings in a growth-themed mutual fund or ETF.
Typically, that growth is measured against corporate profitability as a whole. So a company expected to grow 20 percent per year is a growth stock. But a company expected to grow in line with historical GDP growth of about 3 percent is still growing, but it’s not a growth stock. Growth stocks can be smaller companies, or companies that are already huge.
What should I look for in a Growth Stock?
First and foremost, the best growth stocks are focused on sales. The company should be showing rising numbers of sales each quarter. Those sales should be driven by a relatively new product that still hasn’t yet saturated the market. It doesn’t have to be profitable. Amazon (AMZN) has been one of the top high growth stocks for years, usually without bothering to post a profit, and investors have come to accept this business model.
It also helps if the company is in a fast-growing market as well. You’re unlikely to find a telecom or utility stock as a growth play, but you will be investing in AI, cannabis, fintech, software, or other sectors that still haven’t been built out yet. Trading in these kinds of growth stocks can reward your portfolio with high returns.
Are Growth Stocks High Risk?
They can be, just as any other investment style such as value investing. That’s why when trading in your portfolio, you’ll want to have a mix of stocks across a number of sectors. How you balance your portfolio is one of the most important investment decisions you can make!
A world of Wall Street equity analysts and financial newsletter writers can often recommend the wrong growth stock, which in turn ends up being a big money loser. That’s because growth stocks are performing better than the market on average in terms of growing their sales and revenues.
If that unexpectedly slows down, capital can quickly flee a growth stock leading to a big, fast loss. Even without a huge loss, these companies can experience rapid swing in prices that many investors may not be able to emotionally handle. So the real risk happens when these investors sell out at the wrong time on a downswing, only to miss the next upswing.
What is the Difference Between Value and Growth Stocks?
A growth stock is a company focused on rapidly increasing its revenues and sales. A value stock, in contrast, is a company that already has established products and sales numbers, but trades at a discount to this information. It will usually trade with a low price-to-earnings (PE) ratio, and may also pay out a generous dividend as well. Growth stocks typically pay no dividend, and thus have no dividend yield.
Value stocks more likely trade on the New York Stock Exchange, and growth stocks tend to trade on the Nasdaq.
Value investors seek companies that don’t necessarily need to grow to become more valuable to shareholders over time. Typically, most investors favor one or the other, and investment newsletters, analysts, and other financial media will try to cater to that focus.