Investing in solid growth stocks is a great way to maximize your chances of beating the broader market's returns. But finding those stocks is easier said than done. And in our unpredictable world, the road to those returns is all too often a bumpy one. For patient investors who know where to look, however, short-term challenges can provide excellent buying opportunities.
So we asked three top Motley Fool investors each to pick a growth stock that farsighted investors might appreciate. Read on to learn why they chose Under Armour (UA -1.97%) (UAA -2.34%), Ambarella (AMBA -0.61%), and 8x8 Inc. (EGHT -2.11%).
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Under Armour won't stay put for long
Steve Symington (Under Armour): Things sure aren't looking great for Under Armour at the moment. Shares of the performance-apparel and athletic-footwear specialist are down more than 55% over the past year, thanks to a combination of a slowdown in its core North American market and multiple bankruptcies of sporting-goods retailers over the past year.
As a result, revenue last quarter climbed "just" 9% year over year to $1.1 billion -- a figure many companies would love to achieve, but which marked Under Armour's second straight period of single-digit growth after more than a decade of at least 10% top-line gains.
But there are other bright spots investors seem to be ignoring. While wholesale revenue rose just 3%, Under Armour's higher-margin direct-to-consumer sales climbed an impressive 20% to $386 million. International sales also skyrocketed 57% year over year (54% at constant currency), yet still represented just 22% of Under Armour's total revenue, leaving the company with a massive runway for global growth.
Perhaps most intriguing, in response to its near-term headwinds: Under Armour began implementing a restructuring plan last quarter to streamline the business, more effectively serve its customers' needs, and better align financial resources to maximize return on investment and value creation for long-term shareholders.
For investors who can look past Under Armour's near-term challenges and focus on that long-term growth story, I think Under Armour is one of the most compelling buys our market has to offer.
Ambarella: High-definition growth
Demitri Kalogeropoulos (Ambarella): Ambarella's shares have been pummeled in 2017 as the camera tech specialist struggles through its second straight year of declining revenue. Results are under pressure by slumping demand in the sports-camera market, a sluggish start in the AI segment, and uneven growth in the drone industry. Yet Ambarella is playing the long game here, with its engineering teams working toward the type of semiconductor design wins that take years to develop but promise to push the industry forward.
Ambarella's tech has made its way into a wide range of new devices recently, including high-definition baby monitors, in-car dashboard cameras, and police body cameras. Those successes helped offset its disappointing failure to win a spot in DJI's flagship consumer drone, the Spark.
Looking further out, the company is launching a new computer-vision chip this year that's the product of almost four years of development work. Management sees this launch as the initial entry in a long line of generational releases that target several price points in the young industry. It's far from a sure thing that Ambarella will dominate this niche, as it did the sports-camera market. But if it does manage to extend its design advantages in capture and processing into new areas like AI and computer vision, the stock could generate huge gains for patient investors.
8x8: Building a business model for long-term success
Anders Bylund (8x8): If you don't know what 8x8 is, you're not alone. The cloud-based communications specialist is not the largest name in its sector, and 8x8's enterprise focus puts it far away from the mainstream.
And even if you do follow 8x8's market adventures on a regular basis, the company is changing right now. It reported mixed earnings in July, showing solid sales growth but disappointing earnings. On top of that, management lowered full-year earnings guidance from $24 million to $9 million, counted in adjusted pre-tax profits. Share prices plunged 12% lower the next day as investors saw a business crumbling before their very eyes.
Or not. You see, 8x8 could have left its earnings target unchanged if it wanted to -- enterprise clients are warming up to its cloud-based voice and video communication tools, and management had the option to just stay the course. Instead, the company is reinvesting the windfall from 8x8's rising revenues and gross profits into a more aggressive sales and marketing strategy. The research and development budget is also increasing at an accelerated pace.
"The market reaction to this smart move is completely backwards and myopic," I said at the time. Since 8X8's shares are trading at a discount for all the wrong reasons, it's a great investment opportunity for farsighted investors.
