You know what's a real buzzkill in investing? Buying into a high-growth stock right at the point when sales start to stall out. Companies starting to mature are still great companies, but they may not be able to put up the gaudy growth numbers they did in prior years. So, to steal a term from famed growth investor T. Rowe Price (the man, not his company), you need to make sure the stock you are buying operates in a "fertile field of growth."
So, we asked three Fool.com contributors to go survey the landscape on Wall Street to find a few stocks that have a fertile field from which they can reap growth. Here's why they picked Roku (NASDAQ:ROKU), SolarEdge Technologies (NASDAQ:SEDG), and Carvana (NYSE:CVNA).
Roku could rock the stock market
Rich Smith (Roku): With no history of profits and little chance of earning a profit this year, Roku isn't the kind of stock a value investor like me would ordinarily be interested in. But just wait -- this stock is just getting started. (And yes, it's high-growth as well.)
According to analysts who follow it (of which there are seven), Roku lost $0.74 per share last year, but is expected to cut its losses by two-thirds this year, then earn its first GAAP profit in 2019, and then go on to grow its earnings by 2,500% over the next three years. From a $0.05-per-share projected profit in 2019, this over-the-top streaming hardware and software maker could grow to the point where it's producing $1.32 per share by 2022.
Where will the earnings come from? Although it's the most obvious part of Roku's business, the answer probably isn't from building hardware. Gross margin at Roku's player division is a measly 10% -- and falling. Rather, Roku's platform division, which sells ads and pitches brands to viewers watching programming that streams from its players, is producing most of the profit and will probably be the growth engine going forward. This asset-light business generated gross profit margin of better than 75% last year. One imagines it could produce similar margins for Roku whether the company continues to produce its own devices or partners up to load Roku software onto devices manufactured by others.
Already Roku has shown itself capable of generating positive free cash flow, churning out cash profits of more than $28 million last year. And yes, at $4.1 billion in market capitalization, that still works out to a triple-digit multiple to free cash flow. But if Roku grows as fast as expected, this stock could be worth the price.
A bright future
Tyler Crowe (SolarEdge Technologies): At some point, a new technology transitions from a passing fad to a ubiquitous component of our lives. Solar power, notably small-scale installations like those on a homeowners' roofs, has become one of those things that crossed that threshold and is now a major business in the U.S. Lower costs, simpler designs, and streamlined installations has made adding solar power to one's roof more cost-efficient than ever before, and inverter and power optimizer manufacturer SolarEdge Technologies has been a driving force in making this possible.
SolarEdge manufactures the products that make it possible to use solar power in our homes. The advantage of SolarEdge's products is that they convert direct current (the kind of power panels produce) to alternating current (the power that we find in our homes), as well as monitor and optimize the output of each panel to maximize efficiency and reduce maintenance. These products have garnered lots of attention from installers and developers and have made SolarEdge one of the top five global manufacturers of inverters.
What's even more compelling from an investment perspective is that SolarEdge has been growing at a staggering pace over the past several years without sacrificing profits. Revenue has grown 58% annually since 2013 and margins have expanded over that time frame such that the company is solidly profitable, debt-free, and churning out loads of free cash flow for its size.
Solar power growth isn't expected to slow down anytime soon. Between now and 2023, annual installations will grow from 10 gigawatts (GW) to 15 GW, according to the Solar Energy Industries Association, and states like California are already taking drastic steps by mandating all new residential homes come with solar panels on them. As SolarEdge's products prove to be one of the best options for smaller-scale installations, the company has a huge opportunity to grow from here.
A unique way to buy
Daniel Miller (Carvana): If you're hunting for growth stocks that are just getting started, Carvana could be a smart choice, having gone public in April 2017. The company is trying to change the way we buy cars by removing the typical dealership infrastructure and replacing it with a quick and easy-to-use online website with next-day delivery, or a pickup from one of Carvana's automated car vending machines. The company's vending machines are coin-activated and fully automated, standing eight stories high and holding up to 30 vehicles.
Carvana's first quarter was a glimpse of the growth it's offering investors. Retail units sold jumped 122% to 18,464, which drove revenue 127% higher year over year to $360.4 million. Carvana's monthly unique visitors on its website jumped to 2 million during April, which was only nine months after achieving the 1 million milestone that took since its 2012 founding to achieve.
Speaking of growth, investors can expect even more top-line increases as Carvana opens more car vending machines and enters more markets. In fact, just last week the company unleashed its 10th and 11th vending machines in Washington, D.C., and Orlando, Florida, respectively. At the end of Q4 2017, Carvana offered services in 44 markets, a number that’s expected to jump to between 79 and 84 by the end of 2018.
Not only will Carvana's rising number of markets help drive top-line revenue higher, but the company is also increasing its total gross profit per unit (GPU). Carvana achieved its highest ever quarterly total GPU during the first quarter, which was a welcome $685 jump to $1,854 per unit. It was a large step toward its midterm GPU target of $3,000.
If you're looking for growth stocks that are in the early innings of a hopefully long game, Carvana offers a unique consumer car buying experience and is growing its top line and GPU rapidly, but it will need to find a way to differentiate its website from other online vehicle sellers to have tantalizing long-term potential.
Daniel Miller has no position in any of the stocks mentioned. Rich Smith owns shares of SolarEdge Technologies. Tyler Crowe owns shares of SolarEdge Technologies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.