Growth stocks are extra exciting because they're growing at a rapid clip. If you look at two stocks, one that has averaged annual growth of 11% over the past five years and one that has averaged 44%, the latter will likely be more intriguing, and one that you'd like to see in your own portfolio.
It's important to remember, though, that not every rapid grower is a great candidate for your portfolio -- because many have grown beyond estimates of their intrinsic value. Many have also soared on more enthusiasm than reasoning. Still, there are great growth stocks out there worth considering -- and here are three of them.
1. Etsy
If you haven't been paying attention to Etsy (ETSY +3.21%), thinking it's just a site where some crafters sell their wares, you probably don't realize that the stock has soared more than 600% over the past three years (an annual average rate of 94%) and the company now sports a market value near $25 billion.
As of the end of 2020, Etsy boasted 4.4 million active sellers and nearly 82 million active buyers. Those numbers generated about $10.3 billion in gross merchandise sales, up 106.7% year over year. The company noted in an investor presentation that, "In a survey of Etsy buyers, 88% agreed that Etsy has items you can't find anywhere else."
Etsy has built an online marketplace with a solid competitive advantage: It's where those who seek to buy (or sell) handcrafted goods are likely to go because that's where the sellers (or buyers) are. Recent data from the company shows that not only is it growing its number of buyers, but its buyers are spending more, too.
The company has grown quite large, but it has a lot more growth potential, in part due to international expansion. It recently entered the enormously populous nation of India, for example. Etsy is also growing by expanding its scope. Last year, for instance, it bought the music marketplace Reverb. Finally, the company's light business model is another big plus, as its growth doesn't require lots of new brick-and-mortar stores or warehouses full of inventory -- instead, it just charges its sellers fees.
2. Pinterest
Pinterest's (PINS 5.03%) stock has more than tripled over the past two years, averaging about 80% annually. It calls itself "a visual discovery engine, where people find inspiring creators, shop new products, and seek out ideas to take offline." In practice, it's where people discover, collect, and share ideas -- about décor, style, clothing, foods, drinks, travel, and more. The company only began in 2010, but it's already commanding a market value topping $50 billion, with plenty of investors believing it has far more growth ahead.
Just how fast is it growing these days? Here's an idea, from its latest earnings report: "Q4 revenue grew 76% year over year to $706 million. 2020 revenue grew 48% year over year to $1,693 million. Global Monthly Active Users (MAUs) grew 37% year over year to 459 million." Having close to half a billion users is a big deal, and it's key to the company's potential, because if it's able to monetize them to a greater degree, it can generate a lot of income.
Keep in mind that Pinterest knows a lot about its members, because it has data about items they are looking at and following. That means it can offer marketers especially promising members to market to. Last year, Pinterest added a "Shop" tab, which makes it easier for its users to transact.
International expansion is another opportunity: The company was recently only generating about 16% of its revenue outside the U.S., but foreign revenue grew by 129% from 2019 to 2020, versus 39% in the U.S.
3. Poshmark
Poshmark (POSH +0.00%) calls itself the "leading social marketplace for new and secondhand style." It had its initial public offering (IPO), where it launched shares for trading in the open markets, in January, with its shares popping more than 140% on their first day. They have fallen since then and were recently down 59% from their high, leaving the company with a market capitalization of $3.2 billion.
The company has been around in the U.S. since 2011 and already has 70 million registered users in the U.S., Canada, and Australia, shopping more than 200 million items, with a sale occurring every second in the U.S. An interesting angle to the company is that it combines social media with shopping, and may thereby keep customers returning to chat -- and often, in the process, buy.
This is clearly a young company, without a long track record of publicly reported earnings reports, and there's a fine case to be made to give it time to prove itself. It's often smart to avoid fresh IPOs in general, anyway. Still, if you look more deeply into Poshmark and really like what you see, you might start a small position in it and build from there. If it's very successful in the long run, you may be well rewarded.
Growth stocks can add more excitement to your portfolio -- and there are plenty more than the three above. Just do enough digging into them to be pretty sure that you're buying them for less than they'll be worth by the time you sell -- ideally many years from now.
