In 2016, Bank of America/Merrill Lynch released a report that aimed to answer the age-old question of which is the better investment: growth stocks or value stocks?
For its research, B of A/Merrill Lynch analysts examined the 90-year period between 1926 and 2015. Their research found that value stocks outperformed growth stocks over this 90-year time frame (17% returns per annum versus 12.6%). Mind you, no one is complaining if they're achieving a 12.6% annual return per year over a nine-decade stretch, as opposed to 17%.
However, the data also showed an interesting, and somewhat recent, bifurcation. As interest rates have lowered considerably since the Great Recession, growth stocks have begun to run circles around value stocks. That's because access to capital is less costly, making it more enticing for growth stocks to get aggressive with regard to innovation, acquisitions, and hiring. With this low interest rate environment perhaps becoming the new norm in America, it squarely puts high-growth stocks in focus to outperform.
If you're looking to shore up your portfolio and secure your financial future, then the following three high-growth stocks may be just what you need.
When it comes to high-growth stocks, none may have a brighter, or safer, future than e-commerce giant Amazon.com (AMZN -3.01%). Interestingly, though, the company's e-commerce operations aren't necessarily what'll be driving growth for years to come.
As you're probably aware, Amazon is responsible for a good chunk of online sales in the United States. According to eMarketer, it's estimated to capture almost 38% of all online sales in the U.S. in 2019, and more than 5% of all retail sales in the country. Amazon's lower overhead costs allow it to consistently undercut most brick-and-mortar retailers on price, while its Prime membership, which also gives users access to streaming content, keeps consumers exceptionally loyal to the brand.
But the real advantage for Amazon is its cloud services operations, known as Amazon Web Services. AWS, which primarily caters to small-and-medium sized businesses, has been growing at a considerably faster rate than the company's e-commerce operations. More importantly, margins associated with AWS are astronomically higher than the low margins associated with retail sales.
Case in point: Amazon has generated a combined operating income of $3.16 billion from $107.03 billion in global non-AWS sales (i.e., mostly e-commerce) through the first six months of the year. Yet, it generated $4.34 billion in operating income over the same timeframe from just $16.08 billion in AWS sales. As AWS grows into a larger percentage of total sales, it would not be surprising if Amazon's cash flow per share doubled over the next four or five years.
Pardon the pun, but Intuitive Surgical is on the cutting edge of innovation and surgical procedures. As of the end of the second quarter, the company had an installed base of 5,271 da Vinci machines worldwide, which is far and away more than any of its closest competitors... combined. And, keep in mind, this is a world with an aging population that's likely to lean on medical procedures to improve quality of life.
But you might be surprised to learn that the company's pricey da Vinci surgical system, which ranges in price from $0.5 million to $2.5 million, isn't Intuitive Surgical's big moneymaker. Rather, Intuitive Surgical makes the bulk of its margin by providing instruments for each procedure on its da Vinci system, as well as by regularly servicing the system. Similar to how Amazon's margins should rise over time as AWS grows into a larger percentage of overall sales, Intuitive Surgical should see its margins expand as its installed base of machines climbs.
It's also worth mentioning that the da Vinci surgical system is nowhere near peak surgical saturation. Though Intuitive Surgical does hold significant market share in urology and gynecology procedures, it has a long runway to develop in thoracic, colorectal, and general soft-tissue surgeries. In other words, a double-digit growth rate is very much possible over the long run.
A third high-growth stock that investors should consider to shore up their financial future is Square (SQ 0.61%), a provider of point-of-sale solutions for businesses, as well as financial solutions for individual consumers.
As a mobile payment platform that's looking to innovate and disrupt established players, Square appears to be getting the job done. Adjusted revenue grew 46% on a year-over-year basis in the second quarter, with gross payment volume (GPV) rising 25% to $26.8 billion. What's interesting, though, is that Square is traditionally known as a platform of choice for small-and-medium-sized businesses and entrepreneurs. Yet, the company's gross purchasing volume is benefiting from a greater number of large sellers, which represented 54% of GPV in Q2 2019. If Square can continue to attract these bigger fish, it has a real shot of capturing a larger percentage of GPV worldwide.
Perhaps even more impressive is the growth Square is generating from its individual-focused subscription services, such as Cash App. This subscription and service-related segment delivered 87% year-on-year revenue growth in the second quarter, with my financially focused colleague Matthew Frankel noting that Cash App has seen its monthly active user count more than double from 7 million to 15 million between the end of 2017 and the end of 2018. Cash App could be the perfect means for Square to market innovative new financial tools.
With Square arguably still in the early stages of monetizing its two-pronged platform, yet on track to potentially triple sales between 2018 and 2022, it looks like the perfect innovative play for investors to own in the financial sector.