Growth stocks are companies that increase their revenue and earnings at a faster rate than the market average. These stocks often trade at high valuations that are justified by future potential -- making them an ideal bet for investors looking to beat the market over the long term.
DraftKings (DKNG -1.73%) and Amazon (AMZN -1.07%) are two top growth stocks with dominant positions in their rapidly expanding industries. Let's dig a little deeper to see why investors should consider adding these companies to their portfolios.
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DraftKings: An innovative business model
The sports betting industry is projected to expand at a compound annual growth rate of 8.83% until 2024, and few companies are better positioned to ride this wave than DraftKings, an online casino that benefits from its rapid growth and digital-focused business model.
Unlike sports betting competitors Penn National Gaming and MGM Resorts International, DraftKings has been spared the full impacts of the ongoing coronavirus pandemic because it offers esports betting and simulated leagues to keep customers gambling while live sports seasons are on hiatus. It's also less dependent on physical casinos, hotels, and restaurants than its more traditional rivals.
This digital-focused strategy could give the company a long-term edge -- especially with the tech-savvy millennial and centennial generations.
DraftKings reported second-quarter earnings on Aug. 14, and the results demonstrate respectable growth despite sports seasons being canceled for much of the quarter.
Total revenue jumped 24% to $70.93 million as DraftKings rolled out its sports betting platform in Colorado and expanded its stand-alone casino app to New Jersey, Pennsylvania, and West Virginia. With live sports content limited during the coronavirus pandemic, the company has invested in its esports offerings with Madden simulated games (which are designed to predict the outcomes of real matchups), Counter Strike: Global Offensive, and Fantasy Call of Duty helping drive growth.
Amazon: A blue-chip growth machine
With a market cap of $1.6 trillion, Amazon might look like it's done growing -- but it isn't. This mega-cap tech stock is poised for continued expansion because of its industry-leading cloud computing business and the automation of its e-commerce operations.
Amazon reported second-quarter earnings on July 31, and the results demonstrate the company's increasing reliance on its high-margin Amazon Web Services (AWS) segment to drive earnings and cash flow.
Net sales increased 40% to $88.91 billion while operating income spiked by 89% to $5.84 billion. But while AWS only represented 12% of revenue in the quarter, the segment was responsible for a staggering 57% of operating income -- making it by far the most important operation from a cash flow perspective.
AWS enjoys a 48% market share and is poised for continued growth as businesses move computing away from traditional data centers to the public cloud.
Amazon is also making big moves on the e-commerce side of things.
In August, the company got FAA approval to operate its fleet of Prime Air delivery drones. According to David Carbon, vice president of Prime Air, Amazon is aiming to reduce package delivery times to as little as 30 minutes -- a move that could potentially give his company an edge in delivering time-sensitive or perishable item categories.
The takeaway
Growth stocks are ideal for investors who want explosive returns in the stock market, but it's important to pick one that will justify the increased risk. DraftKings and Amazon look poised to outperform because of their innovative business models and long-term growth drivers.
