It's impossible to tell whether a stock is cheap or expensive just by looking at its price. No company proves this better than Amazon.com, which traded at roughly $1,000 per share three years ago and is now priced at over $3,000 per share. The important thing is to focus on high-quality companies with long-term growth potential.
On the other hand, focusing on smaller companies with low share prices can sometimes be a way to identify stocks that have big room for growth and allow you to accumulate a large number of shares. If you're hunting for cheap stocks with explosive growth potential, Zynga (ZNGA +0.00%) and Zuora (ZUO +0.00%) are two companies with shares trading below $20 that are primed to deliver big returns.
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Zynga
The video game industry still has a huge runway for expansion, as more people pick gaming up as a hobby, and catalysts including new in-game monetization opportunities and a growing global middle class pave the way for increased player spending. Zynga is a company that specializes in games for mobile platforms, and it's poised to benefit from growing demand for interactive entertainment.
The video game maker has a market capitalization of roughly $10.5 billion, and its stock is currently priced in the range of $10 per share. Zynga's market cap has roughly tripled over the last few years thanks to smart moves and strong performance from key software, but it still has plenty of room for growth.
Zynga was struggling just a half-decade ago due to declining sales for some legacy titles and soggy performance for new releases, but it's thriving after a strategic reshuffling and is reaping the rewards of being positioned to take advantage of gaming industry tailwinds. Completing a string of successful game studio acquisitions and integrations and honing its approach to driving engagement and monetization for core franchises has given the company a stable of bankable properties and reliable development resources.
Video games can have very long product life cycles these days thanks to downloadable content updates, and the introduction of successful new franchises could power Zynga to stellar growth over the next decade and beyond. The company also has a strong balance sheet, with a net cash position of roughly $500 million, so the publisher still has flexibility to bring promising new studios into the fold.
Zynga stock trades at 32 times this year's expected earnings and stands out as a top pick for investors looking for exposure to the fast-growing video game industry.
Zuora
Few trends have played a bigger role in shaping commerce over the last decade than the migration of businesses to online spaces and the rise of the subscription-based business models. Online businesses often enjoy the benefits of having large addressable markets, and they can offer added convenience for consumers and enterprises. Subscription-based service models create recurring revenue streams that are more predictable and typically more profitable over time.
Zuora is a company that's benefiting from, and helping to facilitate, both of these powerful trends. It provides software that allows companies to easily implement and maintain subscription-based payment systems -- enabling enterprises to bring new customers into payment systems, analyze the effects of potential business decisions, and handle billing. The company is still solidly in small-cap territory with a valuation of roughly $1.4 billion, and its stock trades at roughly $12 per share as of this writing.
Enterprise preference for recurring revenue and continued growth for online business stand out as safe bets, and Zuora has the opportunity to be a driving force in the evolution of the subscription economy. The company has huge potential to boost sales and earnings as it brings more business customers on board its platform and introduces new service offerings.
The digital subscriptions specialist is also set up to benefit from its customers' success because it receives a cut of the sales that partners process using its services. That's the sort of symbiotic dynamic that should delight growth investors and can help foster tremendous performance over the long haul.
Zuora is valued at roughly 4.6 times this year's expected sales and isn't profitable yet, but don't let the lack of near-term profits put you off. Last quarter, Zuora posted a non-GAAP (adjusted) gross margin of 79% for its subscription services, which suggests that the company should be able to deliver substantial earnings as sales rise compared to customer acquisition and tech development expenses.
