It's often said that the riskiest stocks can generate the biggest rewards. That isn't a reliable investing mantra, since many high-risk stocks can drop to zero, but many of history's greatest growth stocks endured long periods of uncertainty before generating multibagger returns.
Let's examine three stocks that fit the high-risk, high-reward profile, and let's see why investors should keep an eye on them over the next few quarters.
Image source: Getty Images.
1. Zoom Video Communications
Zoom Video Communications (ZM 2.05%) went public in April 2019, and its stock has subsequently surged more than 1,200%, especially when the COVID-19 pandemic effectively turned its video conferencing platform into a household name.
Zoom's revenue rose 88% in fiscal 2020 (which ended this January), and its adjusted EPS soared 483%. In the first half of fiscal 2021, its revenue surged 270% year over year as more people stayed at home during the pandemic, and its adjusted EPS grew tenfold. Its number of customers contributing over $100,000 in trailing 12-month revenue more than doubled year-over-year in the second quarter.
For the full year, Zoom expects its revenue to rise 281%-284%, with a sevenfold increase in its adjusted earnings. Those dizzying growth rates make it difficult to tell if Zoom, which trades at nearly 200 times this year's earnings and roughly 60 times this year's sales, is actually overvalued.
Analysts expect Zoom's growth to cool off next year with 30% revenue growth and 15% earnings growth. However, a second wave of COVID-19 infections, which has already started throughout Europe, could support Zoom's continued growth well into fiscal 2022. That uncertainty makes Zoom a risky stock, which could nonetheless rally even higher next year.
2. Snowflake
Snowflake (SNOW 2.24%) went public last month in the largest software IPO in history. Its cloud-based platform, which stores and analyzes data for large companies, attracted big IPO purchases by Warren Buffett's Berkshire Hathaway and salesforce.com, and the stock more than doubled on the first day of trading.
Investors were dazzled by Snowflake's growth rates: Its revenue surged 174% in fiscal 2020 and grew another 133% year over year in the first half of 2021. Its customer base more than doubled year over year to 3,117 at the end of July, and it already serves 146 for the Fortune 500 companies.
They were also impressed by the disruptive potential of Snowflake's platform, which breaks down data silos across large organizations and centralizes the fragmented data so it can be visualized and analyzed. However, Snowflake remains deeply unprofitable, and it's currently valued at 165 times its trailing 12-month sales.
Even if Snowflake's revenue rises 130% this year, it would still be valued at over 100 times sales -- which makes Zoom look like a bargain. That being said, Snowflake could continue defying fundamental gravity if it continues churning out triple-digit growth in customers and revenue -- which makes it a top high-risk stock to watch.
3. Beyond Meat
Beyond Meat (BYND 3.77%), a pioneer in plant-based meat products, went public in May 2019 and subsequently surged nearly eight times from its IPO price. Like Zoom and Snowflake, Beyond Meat is generating explosive top-line growth: Its revenue rose 239% last year, and it jumped another 96% year over year in the first half of 2020.
Image source: Beyond Meat.
The company's meteoric growth can be attributed to partnerships with top restaurants and retailers -- including Yum Brands, Costco, and Walmart -- which quickly boosted its brand recognition among mainstream consumers.
The company isn't profitable yet, but its net losses narrowed last year and in the first half of 2020. However, Beyond Meat remains richly valued at 25 times this year's sales, 16 times next year's sales, and nearly 300 times next year's earnings -- assuming it becomes profitable in 2021.
The bears will likely warn that Beyond Meat still faces competition from Impossible Foods and other rivals and that plant-based meat products could be a passing fad. Nonetheless, Beyond's early mover's advantage, its growing brand recognition, robust sales growth, and narrowing losses all indicate its high-risk stock could generate big rewards for patient investors.
