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3 High-Growth Stocks That Are Just Getting Started

By John Ballard – Updated Jun 28, 2020 at 9:51AM

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Investors, take note: These stocks look like sure multi-baggers.

Investors looking for stocks with big return potential should focus on companies tapping into long-term megatrends. The three companies we're looking at today serve cloud identity management, streaming entertainment, and interactive at-home fitness. All of these markets represent big growth opportunities, which have driven stellar performance to date for Okta (OKTA -0.60%), Roku (ROKU 2.87%), and Peloton Interactive (PTON 5.70%)

Here's what you need to know about each stock.

Okta: Another way to ride the cloud

More organizations around the world are continuing to shift their data systems to the cloud, which is driving up demand for cloud identity management solutions. Large corporations are turning to the Okta Identity Cloud platform to provide employees with secure access to enterprise programs from anywhere on multiple devices.

Close-up of the corner of a keyboard with one key shaped like a padlock

Image source: Getty Images

Okta's revenue more than doubled between fiscal 2018 and fiscal 2020, and the company expects the top line to grow approximately 32% this year to reach $770 million to $780 million. Management estimates the total addressable market for the workforce at $30 billion, while the opportunity for customer identity solutions is $25 billion. 

A sign that Okta is taking its game to another level is the growth coming from large enterprise customers. It added a record 142 customers with a contract value greater than $100,000 in the fourth quarter of fiscal 2020. It followed that strong performance up with another 113 high-value sign-ups the following quarter. 

Due to the economic disruption caused by COVID-19, management expects there to be delays in closing some deals, which could affect the company's performance in the next two quarters. 

But looking further out, co-founder and CEO Todd McKinnon sees the trends toward cloud and hybrid information technology accelerating. "We have no doubt that a much higher percentage of workforces will be connecting remotely, and we see that as an inevitable long-term trend," he said during the fiscal first-quarter call. 

While Okta continues to report net losses as it invests in growth, the business generated a 16.3% free cash flow margin last quarter, and it expects to remain free cash flow positive in fiscal 2021. But the stock isn't cheap, trading at over 550 times trailing free cash flow. At a minimum, consider keeping this one on your watchlist. 

Roku: A streaming stock that is immune to streaming wars

The COVID-19 pandemic saw an acceleration in the adoption of streaming video entertainment. Roku had already been enjoying strong growth in recent years thanks to the explosion of streaming services, and the shelter-in-place period in the first quarter certainly benefited its business.

Active accounts increased 37% year over year in the first quarter to 39.8 million with streaming hours up 49% to 13.2 billion. Roku monetizes its users through advertising, subscription services, and other transactions on its platform. Overall, total revenue jumped 55% year over year to $320.8 million last quarter.

The Roku TV home screen with icons for different streaming services and apps

Image source: Roku

User engagement continued to show strength in April with total streaming hours up 80% year over year and streaming hours per account up about 30%. Many theaters remain closed, and Roku is benefiting as Hollywood studios send some releases straight to streaming services, such as Walt Disney's recent move to bring Artemis Fowl straight to Disney+ on June 12. 

There have been some ad cancellations stemming from the economic fallout of COVID-19, but this has been partly offset by new ad spending shifting from traditional TV to digital streaming -- and that's a leading indicator of what's going to happen long term. But in the short term, softer ad spending will be a headwind for Roku, so management is not providing guidance given this uncertainty. 

Overall, Roku is in a great position to deliver growth for investors. During the most recent earnings call, CEO Anthony Wood said: "We believe that the pandemic is accelerating secular trends toward streaming and that these changes will be permanent." 

The stock is up more than 400% from its first-day closing price but has slid recently over the softness in ad spending. When the dust clears, the stock will likely resume its ascent. Roku expects the growth of streaming to continue reallocating advertising budgets onto its platform. With one in three smart TVs sold in the U.S. being Roku TVs, this top streaming stock is still in the early innings of its growth story. 

Peloton Interactive: Turning exercise into a subscription service

The maker of interactive fitness bikes went public last September, and it has posted nothing but stellar results. Revenue increased 66% last quarter to reach $524.6 million. The shelter-in-place period actually resulted in a massive jump in engagement with average monthly workouts per subscriber accelerating to 17.7, up from 13.9 in the year-ago period.

A woman seated on a Peloton exercise bike with a man next to her in a living room

Image source: Peloton

Peloton finished the fiscal third quarter in March with 886,100 connected fitness subscribers, up 94% year over year. The influx of new subscribers caused gross margin to improve to 46.8%. 

CEO John Foley said it all during the conference call: "Over the past several weeks, we believe we are accelerating our market share gains of the $600 billion global fitness industry and increasing our lead as the largest and most scaled connected fitness platform in the world." 

Foley believes a permanent shift has taken place with social distancing and working-from-home trends changing consumer behavior. Peloton has momentum, and management is looking to build on its lead with investments in new products, software, fitness programming, and international growth. This is an emerging top consumer brand that you'll want to own for the long haul.

How to invest in high-growth stocks

Growth stocks often appear overvalued, but that doesn't mean they are. All three stocks featured here have rich valuations, but if Okta, Roku, and Peloton continue to claim their slice of massive, growing industries, these stocks will prove their worth over time.

John Ballard owns shares of Okta, Peloton Interactive, and Walt Disney. The Motley Fool owns shares of and recommends Okta, Peloton Interactive, Roku, and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Okta Stock Quote
$56.53 (-0.60%) $0.34
Roku Stock Quote
$58.02 (2.87%) $1.62
Peloton Interactive, Inc. Stock Quote
Peloton Interactive, Inc.
$7.33 (5.70%) $0.40
The Walt Disney Company Stock Quote
The Walt Disney Company
$95.65 (1.40%) $1.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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