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2 Top Growth Stocks to Buy Now

By Trevor Jennewine – Aug 18, 2021 at 7:34AM

Key Points

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Both of these tech companies help clients operate more efficiently.

Over the last 15 years, growth investors have done quite well for themselves. In fact, according to S&P Global, growth stocks have generated an annualized return of 13.4% over that time period, significantly beating the 8% and 10.9% annualized returns of value stocks and the S&P 500, respectively.

Moreover, the Federal Reserve has kept interest rates low throughout the pandemic, creating an environment where capital is cheap and stocks look more attractive than bonds (especially growth stocks). And despite a potential rate hike in 2023, I expect growth stocks to maintain their outperformance in the years ahead.

With that in mind, Paycom Software (PAYC -1.83%) and The Trade Desk (TTD 4.97%) look like smart stocks to buy right now. Here's what investors should know.

Investor watching city skyline, overlaid with upward-trending arrows.

Image source: Getty Images

Paycom Software

Paycom specializes in human capital management (HCM). Its platform helps clients navigate the employee life cycle from recruitment to retirement, providing a comprehensive solution that eases the administrative burden on human resources departments.

Specifically, Paycom's software addresses talent acquisition, time and labor management, and payroll, helping companies across industries find and retain the best employees. More importantly, its platform is built on a core system of record, reducing the cost and complexity of managing multiple databases.

To further differentiate itself, Paycom has designed its business around customer satisfaction. Case in point: The company assigns a dedicated specialist to each client, giving them personalized service. As a result, Paycom's customer retention rate was 93% last year, a figure made even more impressive by the economic uncertainty created by the pandemic.

Collectively, these advantages have translated into a solid financial performance.

Metric

Q2 2018 (TTM)

Q2 2021 (TTM)

CAGR

Revenue

$498 million

$931.8 million

23%

Free cash flow

$105.4 million

$161.8 million

15%

Source: Ycharts. TTM = trailing 12 months. CAGR = compound annual growth rate.

Looking ahead, Paycom recently released a new product that could be a significant growth driver, Beti (for Better Employee Transaction Interface). This is the industry's first self-service payroll technology, which automates and streamlines the process by allowing employees to do their own payroll.

During the first-quarter earnings call, management forecast 100 pilot clients for Beti by the end of the second quarter, but Paycom crushed that figure. According to CEO Chad Richison, "Through the end of July, we've already sold Beti to over 1,000 new and existing clients."

From a broader perspective, Paycom's ability to simplify HCM gives it an edge, and as companies look to cut costs and drive efficiency in the wake of the pandemic, its software should see strong demand. That's why this growth stock looks like a smart investment right now.

Investor analyzing financial data.

Image source: Getty Images

The Trade Desk

The Trade Desk helps its clients buy digital ad space. Its demand-side platform (DSP) leans on big data and artificial intelligence, allowing brands to deliver targeted ads across computers, connected TV (CTV), and mobile devices. More importantly, its programmatic technology makes it possible to automate campaigns, measure results, and optimize ad spend in real time, none of which are possible with traditional solutions.

So, what sets The Trade Desk apart from the rest of the industry? Simple: The Trade Desk is the leading independent DSP, meaning it's not affiliated with any content. By comparison, Alphabet owns Google Search and YouTube, both of which sell ad space, and the company also provides ad-buying tools to marketers. Put another way, Alphabet is incentivized to push its own ad inventory, creating a conflict of interest.

Of course, Alphabet is much larger and it commands far more market share, but The Trade Desk is still growing quickly. The company has kept its retention rate above 95% over the last seven years, evidencing its ability to create value for clients.

Metric

Q2 2018 (TTM)

Q2 2021 (TTM)

CAGR

Revenue

$380.1 million

$1 billion

40%

Free cash flow

$41.7 million

$280.1 million

89%

Source: Ycharts.

Recently, The Trade Desk launched Solimar, the latest update to its ad tech platform. Among other changes, Solimar offers an upgraded user interface for fine-tuned campaign goals, as well as improved targeting and measurement capabilities. It should make The Trade Desk a more valuable partner to brands and marketers.

Programmatic digital advertising helps marketers operate more efficiently, and the industry is growing rapidly, as more brands shift ad budgets away from traditional solutions. In fact, eMarketer forecasts that digital ad spend will reach $645 billion by 2024. Given its differentiated business model and strong customer retention, The Trade Desk should see strong demand in the years ahead.

Like Paycom, this growth stock is another smart investment right now.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Trevor Jennewine owns shares of Paycom Software and The Trade Desk. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Paycom Software, and The Trade Desk. The Motley Fool has a disclosure policy.

Stocks Mentioned

Trade Desk Stock Quote
Trade Desk
TTD
$54.49 (4.97%) $2.58
Alphabet Stock Quote
Alphabet
GOOGL
$100.44 (-0.55%) $0.55
Alphabet Stock Quote
Alphabet
GOOG
$100.83 (-0.44%) $0.45
Paycom Software Stock Quote
Paycom Software
PAYC
$339.87 (-1.83%) $-6.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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