Holding shares of fast-growing companies is a proven way to build lasting wealth. In fact, there is recent research that shows how rewarding this can be for long-term returns.
A study by McKinsey found that companies returned an extra three to four percentage points of shareholder returns for every five percentage points of revenue growth per year. The study looked at 5,000 publicly traded companies from 2005 through 2019.
It’s ideal to buy growing companies while their stock prices are down, before the market realizes the value underlying their market opportunity. That’s exactly the opportunity investors have right now with the following companies.
1. SentinelOne
SentinelOne (S) is one of the fastest-growing cybersecurity firms. The company’s annual revenue climbed almost 10-fold between fiscal years 2020 and 2023. The mission-critical nature of this market makes it worth considering for any investor looking to juice their returns.
The stock trades well off its previous highs. Wall Street is concerned about slowing growth in the near term. The company grew revenue by 70% year over year in the most recent quarter, but guidance for next quarter points to moderating top-line growth.
Enterprises are tightening their spending budgets in the face of economic uncertainty, but the market’s focus on near-term headwinds opens up a good buying opportunity — and the long-term opportunity is still intact.
SentinelOne might see slowing growth this year, but it should keep posting high rates of growth for several years. Total spending on cybersecurity was estimated at $71 billion in 2022, according to Statista, up from $41 billion in 2019. It should keep growing as companies wrestle with the staggering losses that occur with each successful cyberattack.
SentinelOne is proving to have very competitive technology to win new customers. As generative artificial intelligence (AI) becomes more widely used for creating new content, cybercriminals exploit the vulnerabilities in these applications to attack organizations. The company responded with its Purple AI technology, which uses generative AI to help security teams manage risks and learn about potential threats.
There are several leading cybersecurity stocks to choose from, but SentinelOne continues to grow faster than its competitors, which speaks volumes about its offering. Given its relatively low price-to-sales valuation, investors should consider buying the stock before the market wakes up.
2. Monday.com
Monday.com (MNDY) is another top-growth stock that reported blazing growth but experienced growing pains in the near term.
Monday is a leading provider of work management software, which grew in demand as companies look for ways to improve employee productivity. Monday’s Work OS makes it easy to manage workflow and troubleshoot issues. Exploding demand for the service sent revenue up five-fold over the last three years.
Like SentinelOne, Monday.com was an expensive, unprofitable growth stock that fell out of favor last year, but that spells an opportunity for patient investors. In fact, Wall Street is warming up to it again and the stock is up 47% year to date. These gains are supported by more growth — Monday.com reported a revenue increase of 50% year over year in the first quarter.
The rollout of new AI capabilities to the platform should keep demand growing. These new features will make Work OS even more intuitive, which was its main advantage over competitors. Management expects revenue growth to slow in the second quarter, as companies grow more cautious with their budgets. But companies are not going to stop looking for ways to speed up software development and gain efficiency.
Even with revenue growth expected to slow to 36% to 37% in the second quarter, Monday serves a large and growing addressable market estimated at $47 billion in 2021, according to Grand View Research. It could grow for a long time, and with the stock trading well off its highs, now could be the ideal time to buy, especially while the company is still fairly small with just $162 million in quarterly revenue.
Once the economic headwinds clear away, SentinelOne and Monday.com could be off to the races.
— John Ballard
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Source: The Motley Fool