Growth stocks can lead to the massive gains that every investor is looking for. But if growth falls short of investor expectations, they can drop like a rock.
We asked three of our contributors for their favorite growth stock today, and Arista Networks (ANET -4.32%), Square (SQ -2.28%), and Wynn Resorts (WYNN -1.16%) made the list. Not only do they have a lot of growth opportunities ahead, but the market may also be overlooking these stocks right now.
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Faster, better cloud networks
Todd Campbell (Arista Networks): Investors walked away from Arista Networks' latest quarterly update disappointed in management's second-quarter sales growth outlook, but that disappointment could be creating an excellent opportunity for long-sighted investors to buy.
Yes, sales growth will slow in Q2, but growth will still be healthy in the quarter and there's plenty to like about this company's past performance and the future opportunity that lies ahead of it.
In Q1, revenue grew 26% year over year to $595 million because of ongoing demand for switches supporting cloud-based networks. The company's switches continue to make headway against legacy competitor Cisco, but Arista's switch market share remains in the mid-teens, suggesting there's plenty of room left to win away business.
Gross margin improved to 64.5% from 64.1% quarter over quarter as expenses were held in check. Operating income was $224 million, or 37.5% of revenue, and net income was $188 million, or $2.31 per share, which is up 39.2% from one year ago.
Importantly, the headwind to growth could prove temporary. Arista is blaming much of the slowdown on one large customer (likely Microsoft, which is its only customer accounting for over 10% of revenue). Last year, that customer pulled forward purchases, and in Q2 it appears to be digesting those purchases.
Slowing in growth because of a big customer pausing purchases shouldn't be ignored, but the outlook isn't disastrous and it ought to be viewed in the context of this company's long-haul opportunity. Management expects revenue of $600 million to $610 million. That's still 15% above the $520 million in revenue it reported in Q2 2018. The addressable market Arista targets is valued at $16 billion, growing to $23 billion by 2023, and its sales last year were just $2.2 billion. Given that there's plenty of room for future top-line growth and this company's still on pace to deliver a double-digit revenue increase, this sell-off could make now a good time to buy shares.
A high-growth leader in the war on cash
Leo Sun (Square): Square's stock recently tumbled after its first-quarter earnings report, but the sell-off was unjustified. The payment service provider's adjusted revenue rose 59% annually to $489 million, beating expectations by $9 million. Its non-GAAP earnings per share (EPS) rose 83% to $0.11 and cleared estimates by $0.03.
Square's gross payment volume (GPV), the value of all transactions processed on its platform, rose 27% annually to $22.6 billion. Its higher-margin subscription and services revenue rose 126% annually to $219 million, or 23% of its net revenues, and marked the unit's fourth straight quarter of triple-digit growth. Most of that growth was attributed to the growth of its consumer-facing Cash App, Caviar food delivery service, Instant Deposit service for merchants, and Square Capital finance arm.
New bundles, like Square for Restaurants and Square for Retail, are also locking in more customers. Its hardware revenue also rose 18% annually to $18 million, as its new Square Terminal and Square Reader products continue to disrupt the market for traditional POS (point of sale) devices.
Those numbers look solid, but investors fretted over Square's guidance. Square expects its adjusted revenue to rise 42% to 44% annually during the second quarter with $0.14 to $0.16 per share in adjusted earnings. Analysts had anticipated 44% sales growth with earnings of $0.18 per share.
That seemed like a minor miss, since Square often sandbags its guidance. Square even raised the midpoint of its full-year adjusted revenue guidance, from 41% to 43%, and it maintained its prior full-year adjusted EPS forecast for 62% growth. Those long-term numbers look solid, and indicate that investors should buy Square after its recent post-earnings swoon.
A bet on gaming growth
Travis Hoium (Wynn Resorts): The gaming industry has been in expansion mode in the U.S. and Asia for the last two decades. Domestically, the industry has seen regional gaming expand while the Las Vegas Strip steadily grows. Macau has been the industry's biggest growth driver and is now the largest gaming region in the world, with $37.6 billion of gaming revenue in 2018.
WYNN Revenue (TTM) data by YCharts.
The challenge for the industry is finding new areas to grow. Few areas are allowing expansion and the ones that are allowing growth are starting to cannibalize existing areas. But Wynn has a couple of attractive growth options over the next few years.
The first is Boston, where the company is putting the finishing touches on Encore Boston Harbor. The $2.6 billion project could generate over $1 billion in revenue annually when it's fully operational and diversify the company's revenue stream. With opening set for the middle of this year, the resort should start impacting operations soon.
In Las Vegas, Wynn is expanding its convention space with a $425 million addition that will add 430,000 square feet. Not only are conventions and meetings lucrative in and of themselves, the flow of customers moving through the resort drives additional revenue at restaurants, shops, and the casino.
The big project that could drive long-term growth is a resort in Japan. Wynn Resorts, like other operators, is proposing a large integrated resort in Japan that could be the biggest gaming resort in the world. There will be a competitive bidding process, but if Wynn wins, it would drive growth for years to come.
If you're looking for growth in the consumer entertainment space, Wynn Resorts is a great bet with the projects it has opening over the next few years.
Something for everyone
From technology to payments and consumer entertainment, these stocks cover a lot of industries. But they each have their unique growth drivers long term, and that's why they're our top picks for investors this month.
