Value stocks have outperformed growth investments as measured across the entire history of public stock markets, but high-growth investments are crushing their value-based brethren over the past decade or so.
Companies aiming to maximize their business growth above all else tend to thrive when interest rates are low. Easy access to low-interest loans makes it easier to build out a fast-growing business through generous advertising, large sales teams, and other back-end investments. Federal interest rates have been low and stable for years now, setting the stage for some exciting success stories in the growth-stock arena.
With that in mind, here are three fantastic growth companies taking full advantage of cheap debt papers. But wait -- there's more! All three of these stocks have been trading sideways over the last year, despite their outsize growth opportunities. That's why cloud data expert Talend (TLND), video-streaming veteran Netflix (NFLX -0.87%), and network services provider Tucows (TCX 1.62%) should be at the top of your list of research ideas right now.
This media giant in the making is no stranger to the debt market. Netflix has been reporting negative free cash flows (FCF) since the company started creating original content in 2014. $4.8 billion of additional debt was added to its balance sheet last year, and there's probably more of that action coming up in 2020.
Management wrote the following in the fourth-quarter earnings report:
Our plan is to continually improve FCF each year and to move slowly toward FCF positive. For 2020, we currently forecast FCF of approximately $2.5 billion. Along the way, we'll continue to use the debt market to finance our investment needs. With our FCF profile improving, this means that over time we'll be less reliant on public markets and will be able to fund more of our investment needs organically through our growing operating profits.
In other words, Netflix is keeping the pedal to the metal by means of borrowed funds for the moment. Cash flows should turn positive in a few years, and then the company will start to pay down the debt load while also pocketing much larger bottom-line profits.
The stock price is back exactly where it was a year ago, even though Netflix added 27.8 million subscribers in a single year and boosted its trailing sales by 28% over the same period. I've said it before, but I'll say it again: If you're not buying Netflix today, I just don't know what you're looking for anymore.
Long-term debt is a fresh addition to Talend's business plans. The balance sheet was debt-free until the third quarter of 2019, where Talend raised $149 million of net proceeds from a debt offering. Management sees that move as a tool that will widen the company's operating options.
"We now have additional flexibility to invest in the business with this long-term capital," CFO Adam Meister said on the earnings call. "We are focused on shaping our business around the cloud opportunity, and we believe the continued strategic investments in our cloud products and go-to-market strategy will position us to be a leader in data integration innovation."
Revenue rose 20% year over year in Talend's third-quarter report, but share prices have increased by only 2% in 52 weeks. This is another high-quality growth stock whose market momentum stalled in 2019 despite fantastic business results.
This Canada-based provider of domain names and online services started investing in a fiber-based broadband service in 2017. The company holds $105 million of long-term debt today, up from $64 million a year ago and $10 million at the end of 2016. Building fiber networks like Tucows' Ting Internet is a capital-intensive business.
Mind you, Tucows is starting small. The company handpicks each new market based on preexisting infrastructure, local governments' willingness to work with the company's construction plans, and access to an affluent population with a hunger for high-speed internet access. So far, Ting Internet provides service to 9,500 active customers out of 34,000 serviceable addresses.
Ting Internet contributed $2.9 million to Tucows' third-quarter revenue, 42% above the year-ago reading. That's a subscription service with predictably recurring revenue, and it's one of Tucows' most profitable operations. In the third quarter, Ting Internet's gross margin landed at 68% while the company as a whole stopped at 31%.
Ting Internet is Tucows' best asset these days, and it has only just begun. Financing that promising growth avenue through debt papers makes perfect sense to me, particularly when low-interest debt is readily available. Stop me if you've heard this before, but Tucows' stock hasn't exactly matched its business growth recently. Share prices fell 7% in 52 weeks. You know what to do.
Just one more thing
Successful long-term investors start out by buying shares in successful companies. The trick to staying successful over the long run, however, is to stay calm and stick to these companies in difficult times. If the stock price falls dramatically or the company makes business moves in the wrong direction, it's time to determine whether the original reason for your purchase has changed. If your investment thesis still holds water, it's time to ignore the noise and continue investing according to plan. If you can keep your cool in turbulent times, you're well on your way to capitalize on the long-term growth potential of these companies.