Netlfix's (NFLX -0.35%) stock has delivered staggering returns for investors. Consider that over the past five years, the company's share price has climbed a monumental 1,000%. Not many companies can boast of the same success. But there are a handful of stocks that have the potential to outpace Netflix's gains in the coming years.
We asked three Motley Fool investors to track down growth stocks that are flying high right now -- and have plenty more room to grow. They came back with Shopify (SHOP -3.58%), Discover Financial Services (DFS), and HubSpot (HUBS -3.04%). Find out why these companies could leave Netflix's gains behind.
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A good head start
Danny Vena (Shopify): A company will need to have a lot going for it in order to beat the stratospheric gains put up by Netflix -- which is up 29,000% since its market debut in May 2002. Still, it's important to remember that much of that ascent has occurred in recent years. Finding a company that's still in the early stages of its growth story and riding the wave of a once-in-a-lifetime paradigm shift could help reduce the odds.
E-commerce is one such trend. Many purchases once made at brick-and-mortar stores are now made online. And these account for 9.3% of total retail sales in the U.S., up from just 3.5% a decade earlier. Many small- to medium-sized businesses are making the transition to selling online, and that's where Shopify comes in.
This e-commerce leader helps budding entrepreneurs simplify the task of setting up an online store. It provides 100 ready-to-use templates, and more than 2,300 apps to customize the experience for each business' respective customers. It helps to manage sales across a variety of channels, including web, mobile, social media, marketplaces, and even physical stores.
The company also handles other challenges by integrating with shipping and logistics providers, as well as helping with invoicing, the processing of payments, and order tracking. Shopify's ease of use has been a hit with merchants. More than 600,000 of them across 175 countries now use Shopify -- and its international growth is just beginning. The company has also expanded by offering simplified solutions to enterprise-level businesses.
Image source: YCharts.
If you don't think Shopify's returns could put Netflix's to shame, consider this: In three short years as a public company, Shopify has seen its stock price go up 460%; during Netflix's first three years, its stock gained just 90%. So Shopify already has a good head start.
Discover growth at a reasonable price
Jordan Wathen (Discover Financial Services): Banks rarely meet the "growth stock" criteria, due to high capital requirements. But I think Discover Financial Services offers the opportunity to earn high returns from a fast-growing loan portfolio trading at a below-average valuation.
Discover Financial Services is primarily a credit card issuer that targets households likely to carry a balance from month to month. Thus, it generates the majority of its revenue from interest, whereas its peer, American Express, generates more of its revenue from fees on spending.
Discover attracts revolving customers with inexpensive perks, including U.S.-based phone support around the clock and free access to real FICO scores. And while other banks are busy front-loading rewards with sign-up bonuses, Discover's offers are most rewarding to customers who use their card over a full year. Thus, Discover dodges unprofitable customers who want to make a quick buck by opening, and quickly closing, a new account.
Investors assign lower valuations to banks that make more of their money from cyclical-interest income, due to the inherent risk of making money by lending at double-digit interest rates. But it's notable that Discover's underwriting has been excellent, as investors would have to look all the way back to the 1980s to find a period in which the company posted a loss for the full year.
I see Discover as a company that can reliably generate mid-single-digit loan growth and boost returns by using excess cash to aggressively repurchase shares. Trading at about 10 times the consensus earnings estimate for 2018, this card issuer isn't getting the respect it deserves.
This cloud-based platform company is soaring
Chris Neiger (HubSpot): Lots of tech companies are trying to figure out how to benefit from the growing cloud-computing software market right now, while HubSpot is already dominating. The company's inbound marketing platform helps companies connect with their customers, generate leads, and boost customer acquisitions.
The company has taken a new approach to marketing. HubSpot’s platform allows its clients to create content, like blog posts and videos, so that those clients can attract new customers of their own. HubSpot offers its clients a freemium version of its platform that gets them started with some basic marketing tools and then up-sells them on more-robust paid services when they want them. And so far, this model has been wildly successful.
HubSpot's sales grew 39% year over year in the first quarter of this year, and the company increased its customer total by 44% from the year-ago quarter. Sales growth at the beginning of the year was so strong that the company's management upped its full-year revenue guidance range from the previous $481 million to $485 million to the new forecast of $489 million to $492 million.
The company's rapid sales and customer growth has made investors very optimistic about HubSpot's current trajectory. Since the company's IPO just five years ago, HubSpot's share price has climbed nearly 300%. That's impressive in its own right, and it's even more remarkable when you consider that Netflix's share price gained just 161% in its first five years after going public.
What I like about HubSpot right now is that the company isn't just sitting around patting itself on the back for creating a new way of marketing. CEO Brian Halligan said on the recent earnings call that "It feels like we're still in the second or third inning of the HubSpot journey." To maintain its growth, the company is raising its R&D spending to create new products for its customers, and focusing on how it can improve existing services. This forward-looking approach, coupled with HubSpot's already strong sales and customer gains, means investors likely haven't seen the ceiling for this company's stock price just yet.
