Sky-high valuations keep many investors away from growth stocks. Of course, sometimes growth stocks' valuations really have run too far. From time to time, however, high-quality businesses can outperform even the market's most optimistic expectations. While there's no guaranteed formula to finding these stocks, a good place to start a search for these compounding machines is with fast-growing companies with compelling products in large addressable markets.
Three companies that fit this description are cloud computing specialist Fastly (FSLY 2.21%), subscription-management platform provider Zuora (ZUO 0.51%), and cloud-based contact center company Five9 (FIVN 1.16%).
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Fastly
Cloud computing company Fastly (FSLY 2.21%) has carved out a niche for itself in the rapidly growing edge computing market. Making its offering more compelling than legacy incumbents, the tech company has built out its point-of-presence (POP) network using the latest technologies. Fastly's POPs are located at key interconnection points of the internet and are built with solid-state drives (SSDs), making them much faster and more efficient than legacy content-delivery networks. In addition, Fastly's POPs benefit from proprietary software and built-in routing and load-balancing capabilities.
In other words, Fastly is operating at the edge of edge computing -- and developers want in on it. As a result, the company's revenue is soaring, rising 34% year over year in Q2. More importantly, Fastly's enterprise customers, or customers contributing more than $100,000 in trailing-12-month revenue, increased 38% year over year to 262.
There's significant room for the market to grow. Fastly management believes the company's addressable market currently stands at $18 billion. Furthermore, Fastly predicts the market will grow to about $36 billion by 2022. With just $169 million in trailing-12-month revenue, Fastly's current customer base is just the tip of the iceberg.
Zuora
Subscriptions and software-as-a-service business models are all the rage these days. At the center of this trend is Zuora, a company with a platform that helps businesses launch and manage subscription-based services.
"In the old world (let's call it the Product Economy) it was all about things. Acquiring new customers, shipping commodities, billing for one-time transactions," explains Zuora on its website. "But in this new era, it's all about relationships. More and more customers are becoming subscribers because subscription experiences built around services meet consumers' needs better than the static offerings or a single product."
Companies are certainty turning to Zuora for subscription solutions. Its revenue jumped 21% year over year in Q2. The company's subscription revenue, which accounts for 73% of total revenue, rose 24% year over year.
Five9
Five9 is modernizing contact centers with a scalable, cloud-based solution -- and there's a huge market for the company to tap into. Five9 estimates the call center market to be worth $24 billion in annual recurring revenue. In addition, the company believes only 15% of this market is using modern contact center solutions.
Unsurprisingly, Five9 is seeing rapid growth, with revenue in its most recent quarter rising 27% year over year to $77.4 million. Growth from its enterprise customers, or the large businesses that use its platform, was particularly strong. Revenue from these customers went up 36% year over year for the trailing-12-month period ending on July 31.
The company's recent strong momentum prompted management to raise its outlook for its full-year non-GAAP (adjusted) net income. Now Five9 expects non-GAAP net income in 2019 to be between $44.7 million and $46.7 million, up from previous guidance for adjusted net income of between $39.3 million and $42.3 million.
As these are growth stocks, investors who buy these companies should expect a bumpy ride. However, for those willing to hold on for the long haul, these companies have a good chance of earning meaningful returns.
