When a stock outperforms its peers by a wide margin, some investors see this as a reason to look elsewhere. It’s important, however, to identify the reason for the surging stock price, as it may be a sign that the underlying business is thriving and still has further to run. While some investors shy away from these high flyers, fearing they have missed the biggest surge, these companies may represent an opportunity for additional (and sometimes considerable) gains.
We asked three Fool.com investors to identify some of the top growth stocks out there that could still provide noteworthy gains for investors. Read on to find out why they chose HubSpot (NYSE:HUBS), Tencent Holdings (NASDAQOTH:TCEHY), and Netflix (NASDAQ:NFLX).
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Free samples are good marketing
Chris Neiger (HubSpot): HubSpot’s cloud-based marketing platform helps businesses build their online presence, attract new customers, and make better relationships through its customer service software. But HubSpot isn’t just doing this by creating better cloud-based software than its competitors. It’s also doing it by giving much of it away through its freemium model.
HubSpot allows its customers to try out many of its products and services at no charge and then upsells them on more feature-rich services. That might seem like a gamble, but HubSpot has seen fantastic results with this model. In the most recent quarter, HubSpot’s sales grew by 39% year over year to $114.6 million. Most of that revenue came from the company’s subscription services, which brought in $108.6 million in the quarter, an increase of 40% from the year-ago quarter.
This revenue growth has been fueled by the company’s ability to convert nonpaying customers into paying ones, and by offering new services for its customers to sign up for. For example, HubSpot recently launched Service Hub, which allows businesses to better manage customer service. HubSpot’s ability to launch services that its customers want — as well as build out its core offerings — is what’s led the company to boast a customer retention percentage in the high 90s.
The fact that HubSpot’s been able to grow its customer numbers so quickly — and keep customers coming back for more — should be a great indicator to investors that it knows how to keep its business thriving. HubSpot’s optimism about its growth recently led management to increase its full-year revenue estimate to between $489 million and $492 million, up from $481 million to $485 million previously.
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Investors will have to pay a premium for all this growth (HubSpot’s shares trade at about 126 times the company’s forward earnings right now), but that doesn’t mean the company is a bad bet. HubSpot’s ability to attract customers through its freemium model, sell them on paid services, and retain them should help keep the company firmly on its growth trajectory and moving toward profitability.
China’s social and gaming juggernaut
Leo Sun (Tencent): Tencent is China’s top social networking player and the biggest video game company in the world. It owns WeChat, the most popular mobile messaging app in China with over a billion monthly active users; a portfolio of blockbuster games like League of Legends, Arena of Valor, and Clash of Clans; and a slew of other investments in high-growth markets like cloud services, artificial intelligence, mobile payments, and e-commerce.
Tencent’s core growth strategy is to expand WeChat as an all-in-one platform for various services — like deliveries, payments, and gaming. It tethers many of its partners, including Chinese e-commerce giant JD.com, to that growing ecosystem. Its secondary growth strategy is to continue expanding its gaming presence with acquisitions and big investments. It’s a major investor in the developers of PlayerUnknown’s Battleground and Fortnite, two of the most popular PC games in the world.
Tencent’s revenue rose 56% in 2017, and its non-GAAP earnings jumped 43%. Analysts expect its revenue and earnings to grow another 42% and 18%, respectively, this year. Its earnings growth is decelerating due to higher investments in its ecosystem growth, but those moves should strengthen its business over the long term.
Tencent’s stock slumped about 5% this year due to escalating trade tensions between the U.S. and China, but its core business is mostly immune to those headwinds. The stock isn’t a bargain at 39 times forward earnings, but it’s still a great way to profit from the growth of China’s internet and gaming markets.
A stream of new subscribers
Danny Vena (Netflix): With the stock already up 100% so far this year, it may seem foolhardy to lay down your hard-earned cash for Netflix, particularly since it trades at 141 times forward earnings estimates. Yet, a look at the massive opportunity that’s ahead should help put those fears to rest.
In its most recent quarter, Netflix reported strong subscriber growth of 7.41 million, up 50% year over year, bringing its worldwide customer base to 125 million. While those numbers are certainly impressive, they belie the massive opportunity that’s ahead.
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BTIG analyst Richard Greenfield believes that Netflix will top 200 million global subscribers by 2020. Looking further out, Citi Research analysts Mark May and Hao Yan forecast 262 million subscribers within the next decade, more than double its current customer base. One of the most ambitious predictions comes from ARK Invest analyst James Wang, who believes Netflix could triple its subscriber count to 400 million over the next five years.
Netflix generated $3.9 billion in revenue the first quarter, with an average subscription price (ASP) of about $10.24 worldwide. Using the estimate of 200 million subscribers by 2020 and the current ASP would result in quarterly revenue of over $6.1 billion — and that’s assuming no price increase. Including a modest 14% increase bumps quarterly sales over $7 billion, nearly double its current revenue. If the prediction of 400 million customers is used, the number skyrockets.
The company is expanding its creation of localized content to spur growth in its international markets, and plans to spend $8 billion on movies and television shows this year. Netflix’s original content strategy has paid massive dividends and shows no signs of slowing.
Even though Netflix stock has already doubled this year, I think it has much further to go.
This article originally appeared on The Motley Fool.
