Investing in emerging growth stocks for the long haul can be a great way to produce market-beating returns, but with thousands of stocks to choose from, it can be tough figuring out which are worth owning. To help, I went searching for growth stocks that can be added to portfolios and picked Atlassian Corp. (TEAM -1.42%), Mimecast (MIME), and 2U Inc. (TWOU -3.18%) as my favorite stocks to buy in May. Read on to learn if these stocks are right for your portfolio, too.
Team building: A winning business
Scott Farquhar and Mike Cannon-Brookes are to Australia what Apple founders Steve Jobs and Steve Wozniak are to the United States. The two chums started Atlassian after college, and they've become Australian technology superstars thanks to Atlassian's success as a maker of collaboration software.
Although Atlassian's client list spans the globe and its annualized sales are about $900 million, Farquhar and Cannon-Brookes still manage Atlassian with the same core values they did during its early days. Mottos like "don't #@!% the customer" and "be the change you seek" engender a customer-oriented focus that's produced a string of highly popular team software products, including IT collaboration software Jira and idea-sharing tool HipChat.
Atlassian already works with more than 119,000 customers, but Farquhar and Cannon-Brookes think that there's plenty of room left to grow. Their target market is the Fortune 500,000, and thanks to a big commitment to research and development (about 50% of revenue), new software solutions are allowing them to win more revenue from their existing users.
A forward P/E ratio of 94 is evidence that Atlassian isn't a cheap stock. However, sales are growing by 40%, it's producing $86 million in free cash flow per quarter, and it generates positive operating earnings, so I think it will more than grow into its valuation over time.
Securing email is big business
It used to be that companies managed their own email servers, but increasingly, they're shifting their email to cloud-based solutions like Microsoft's Office 365, and that's creating demand for Mimecast, an email security and management solutions company.
Mimecast solutions protect companies from increasingly sophisticated email threats and they can prevent the risk of cloud-email providers experiencing downtime. They also provide email archiving and email discovery -- two services that are increasingly required by regulators.
Accelerating demand for email security and management products from both new and existing users is translating into envy-inspiring growth for Mimecast. Last quarter, its sales clocked in at $67 million, up 39% year over year, and earnings per share shifted from a loss to a $0.03 gain.
Mimecast helps over 30,000 customers with their email needs, including more than 8,000 customers that have shifted to Office 365. I suspect that we'll see increasingly more of its clients shift to Office 365 in the future. If I'm right, then that will drive Mimecast's revenue higher, because Office 365 customers are buying more solutions from Mimecast than non-Office 365 customers.
Education where and when you want it
Bachelor's degrees have become common, so students are turning to graduate degrees to differentiate themselves from the pack. That's proving to be a boon for 2U, because it manages online graduate programs for colleges and universities, including Baylor and Pepperdine.
The company's business model makes a lot of sense. Students are more comfortable with online services today than in the past, and the convenience of online learning dovetails nicely with students' desire for flexible schedules.
Last quarter, growing enrollment in graduate programs helped boost 2U's sales by 42% year over year to $92.3 million. Clearly, there's plenty of demand for online education, but unfortunately, its rapid top-line growth isn't translating into consistent earnings yet. 2U's earnings per share declined to a loss of $0.12 last quarter from a gain of $0.01 one year ago.
The disappointing bottom line doesn't worry me, though. That's because 2U's losses are in large part due to it absorbing the up-front costs associated with launching new online education programs. These programs are expensive to get going, but since 2U shares tuition revenue with its clients, I expect that losses today will pay off with profit down the road.
The company says its pipeline is full and new programs are coming that will drive sales higher in 2018 and 2019. Also, last year's acquisition of GetSmarter, a provider of online short courses, supplies another important source of growth.
Like Atlassian and Mimecast, 2U is addressing a big and growing market opportunity that could make it a much larger company in the coming years. I don't own any of them yet, but I plan on picking them up in my personal portfolio this month. Perhaps these fast-growing companies are worth adding to your portfolio, too.