These Red-Hot Companies Still Have Plenty of Room to Run

The market is full of companies that are seeing tremendous growth, but it can sometimes be overwhelming for investors to know which companies are experiencing a temporary boom and which ones are poised for long-term gains. 

To help you track down red-hot technology companies that still have plenty of more room to run, we asked a few Motley Fool contributors for some stock ideas. They came back with Cloudflare (NET -0.82%), HubSpot (HUBS -2.96%), and Square (SQ -1.14%). Here's why. 

Image source: Getty Images.

This stock is on fire, and it won't quit

Brian Withers (Cloudflare): Cloudflare stock is on a tear. It's bucked the tech stock malaise and is beating the S&P 500 on a year-to-date basis. But what's even more impressive is that this market-beating performance is on top of its 345% gains in 2020. But investors haven't missed the ride, this infrastructure-as-a-service specialist is just getting started.

Let's start by taking a look at the key metrics for its most recent quarter. Top-line growth, large customer expansion, and dollar-based net retention posted impressive gains year over year. The sequential quarterly increases are signs that it has momentum coming out of the pandemic. Chief information officers have been hesitant to implement new technologies with the scramble to manage connections to its remote workforce, but those fears are starting to wane. The company added a record 8,000-plus paying customers in the quarter, which was an impressive 34% year-over-year gain and a 7% increase over the previous quarter.

Data source: Cloudflare earnings release and associated supplemental financial data. QOQ = quarter over quarter. YOY = year over year.

Beyond these stellar results, the company was handed a recent gift in the form of a White House executive order. On the heels of numerous ransomware attacks, the U.S. government is asking businesses to step up their cybersecurity efforts. Even though many companies already utilize some kind of cybersecurity provider, this should push the late adopters to get on board, too. Investors should be excited that Cloudflare is perfectly positioned to welcome these new customers. CEO Matthew Prince said in a recent interview that the executive order "was like reading the Cloudflare product catalog."

This infrastructure-as-a-service provider is firing on all cylinders and has plenty of runway to grow into its 2024 addressable market of $100 billion. If you are hesitant to pick up shares because of its lofty 59 price-to-sales ratio valuation, a suggestion would be to buy in over time. Look to grab a few shares today to get skin in the game. As you become more familiar with this growth stock, you'll likely gain more confidence. With more conviction, add more shares. You'll be happy you did.

Changing the face of digital marketing

Danny Vena (HubSpot): When it comes to advertising, there are few things more annoying than cold calls, spam, pop-up ads, and junk email. Yet marketers need a simple and effective way to connect with potential customers, without driving them away in the process. That's where HubSpot comes in.

The company specializes in "inbound marketing," which focuses on attracting customers and bringing them into the fold, rather than using the traditional outbound marketing approach of trying to get buyers' attention with obnoxious advertising and bothersome and relentless promotion.

HubSpot helps businesses create compelling and valuable online content, including blogs, videos, and websites that attract customers. Gone are the days of customers buying products based solely on blanket advertising. The internet has empowered potential buyers to do their own research, narrow down a list of potential purchases, check out the reviews posted by existing customers, and finally select a product. This trend plays to HubSpot's strengths.

Given the changing paradigm of digital advertising, HubSpot created a platform with a large and growing set of cloud-based tools to help businesses meet customers where they are. The company has expanded beyond its initial focus on marketing, introducing "hubs" that help with sales, customer service, and content management, providing a suite of customer relationship management (CRM) tools for businesses.

HubSpot's focus on simplicity and outcomes is overwhelmingly successful, as evidenced by its financial results. Revenue grew 41% in the first quarter, led by subscription revenue that also climbed 41%. HubSpot is still awash in red ink, with a net loss that worsened compared to the prior-year quarter. That doesn't tell the whole story, however, as HubSpot generated free cash flow that surged more than eightfold. This highlights HubSpot's strong liquidity and the negative impact of noncash expenses (like depreciation) on the company's profits. 

At the same time, HubSpot's total customer base climbed 45% to 113,295, while the average subscription revenue per customer remained stable. Given HubSpot's focus on small and medium-sized businesses and the challenges they faced during the pandemic, maintaining its customer spending is a remarkable achievement.

Early this year, HubSpot announced that it surpassed 100,000 customers and now expects to generate more than $1 billion in annual recurring revenue, which provides a solid foundation for the company's future growth. 

Given HubSpot's compelling growth story and its history of results, shares are priced at a premium, like many of its high-growth peers. The stock currently trades for 21 times forward sales, as investors have been willing to pay up for HubSpot's impressive top-line growth and the potential for explosive profits. Those factors alone should put this stock near the top of any investor's buy list.

Image source: Square.

This fintech company is just getting started 

Chris Neiger (Square): Square has created a massive payment processing platform that works well for both merchants and customers. Square's stock has gained a very impressive 255% over the past three years, but this fintech company still has more room to grow. 

The company has moved far beyond its early days of being just a payment terminal company and now has a peer-to-peer app, called the Cash App, that allows people to easily split a restaurant check, divide the monthly rent, or pay friends for just about anything. 

The Cash App has more than 36 million monthly active users and in the first quarter of 2021, its gross profit reached a record $495 million -- an increase of 171% from the year-ago quarter. 

But it wasn't just Square's Cash App that performed well in the quarter: The company's gross profit spiked 79% and its seller ecosystem saw its gross profit pop 32%. 

To fuel new growth, Square is focusing on expanding its services internationally and is also moving further into cryptocurrency. Cash App users can now buy and sell Bitcoin through the app, as well as send Bitcoin to friends and family. 

Square CEO Jack Dorsey (who's also the CEO of Twitter) said on the company's recent earnings call: "We see bitcoin as the Internet's potential to have a native currency. And we want to further that as much as we can."  

The company is already seeing significant growth from its expansion into cryptocurrencies, as Square's Bitcoin revenue in the first quarter totaled $3.5 billion, an increase of 11 times year over year.  

With Square already creating its own niche in the fintech space, and the company seeing huge growth from Square Cash and its Bitcoin pursuits, it's clear that this company -- and its investors -- still have a lot to look forward to.