Penny stocks, which usually means stocks issued by small companies that trade for less than $5 per share, often attract speculative investors who have been given promises of big returns within a short time. After all, a low-priced stock only needs to rise by a dollar to generate double-digit percentage gains.
But penny stocks are cheap for some pretty obvious reasons. Some of these stocks previously plummeted due to serious fundamental problems, while others only trade on over-the-counter exchanges, which aren't subject to the tighter regulations of the NYSE or Nasdaq. Most penny stocks aren't much better than lottery tickets, or some of the "meme stocks" that recently caught on fire on Reddit.
Instead of chasing penny stocks, let's examine three growth stocks that offer better opportunities for investors who can stomach some near-term volatility: Pinterest (PINS 1.70%), Datadog (DDOG 1.79%), and Peloton Interactive (PTON 3.45%).
Pinterest carved out a high-growth niche in the crowded social media sector with its virtual pinboards, which allow its users to pin and share their ideas, interests, and hobbies with each other. This format, which is particularly popular with older women, is well-suited for sharing fashion and shopping tips -- which makes it a natural fit for integrating digital ads, shoppable pins, and other e-commerce features.
A growing number of big retailers are also uploading their entire catalogs to Pinterest, which widens its moat against Facebook's Instagram and other challengers in the nascent "social shopping" market.
Pinterest's revenue rose 48% to $1.69 billion in fiscal 2020, and its monthly active users grew 46% to 361 million. Its average revenue per user also increased 16% to $4.26, with 27% growth in the U.S. and 62% growth overseas. It remains unprofitable on a GAAP basis, but its non-GAAP net income surged from $18 million to $283 million.
Analysts expect Pinterest's revenue and adjusted earnings to rise 47% and 105%, respectively, this year, as its unique platform locks in more users and advertisers. Its stock still isn't expensive at 66 times forward earnings and 21 times this year's sales -- and it's well-insulated from the political headwinds that are rocking Facebook and Twitter.
Large companies operate a wide range of computing platforms, including servers, databases, cloud services, and mobile apps. Monitoring all those services is a tedious process for IT professionals, but Datadog simplifies the process by pulling all that data onto unified dashboards.
Over 400 software platforms, including Microsoft's Azure and Amazon Web Services (AWS), offer native support for Datadog's dashboards and tools.
Demand for Datadog's services is surging. Its revenue rose 66% to $603.5 million in fiscal 2020, and its number of customers generating over $100,000 in annual recurring revenue increased 46%.
Its "land and expand" strategy, wherein it signs a customer to one product to cross-sell additional services, is also paying off. At the end of the fourth quarter, 22% of Datadog's customers were using four or more products -- up from 10% a year ago. Its net retention rate, which measures its revenue growth per existing customer, has also remained above 130% for 14 straight quarters.
Datadog isn't profitable on a GAAP basis, but it generated a non-GAAP net profit of $71.6 million for the year, compared to a loss of $0.5 million in 2019. It expects its revenue to rise 37%-38% for this year, but for its non-GAAP EPS to decline by 36%-55% as it ramps up its spending.
That near-term profit decline is disappointing, and Datadog's stock certainly isn't cheap at about 40 times this year's sales -- but it could still grow into its valuation as it wins over more enterprise customers with its disruptive business model.
3. Peloton Interactive
When Peloton went public in late 2019, the critics mocked its idea of selling high-end exercise bikes for nearly $2,000 to serve up streaming video workouts via monthly subscription plans. However, the pandemic subsequently created a fertile growth market for Peloton as gyms closed down, and its bike sales, number of subscribers, and revenue skyrocketed.
Peloton's revenue doubled to $1.83 billion in fiscal 2020, which ended last June. Its number of subscribers jumped 113% to 1.09 million as its net loss narrowed from $196 million to $72 million.
In the first six months of 2021, Peloton's revenue soared another 163% year over year to $1.82 billion. Its total subscribers rose 134% to 1.67 million in the second quarter, and it maintained a 12-month retention rate of 92% with a low churn rate of 0.76%. It posted a net profit of $132.8 million in the first six months, compared to a loss of $105.2 million a year ago.
Peloton expects its revenue to rise at least 123% this year, while analysts expect its earnings to nearly triple. But next year, its growth could decelerate as the pandemic ends and more people return to gyms.
Nonetheless, analysts still expect its revenue and earnings to rise 36% and 113%, respectively, next year. Peloton's stock might not seem cheap at over 230 times forward earnings, but it only trades at eight times next year's sales -- which makes it cheaper than many other high-growth stocks in this frothy market.