Growth stocks are always an exciting place to invest because they represent companies with strong cash flows, and revenue and earnings that are expected to outpace the industry average. Additionally, with the coronavirus situation now under much better control -- albeit with uncertainties remaining -- the U.S. economy is now on the mend and in expansion mode, a phase of the cycle that growth stocks tend to do well in.
With that said, we put together a panel of Motley Fool contributors and asked them to identify three great growth stocks to invest $1,000 in. They chose the digital payments processor StoneCo (STNE 3.21%), the global software-as-a-service company Workiva (WK -1.47%), and the cryptocurrency bank Silvergate Capital (SI -0.04%). Read on to see why they think these three companies could have further potential ahead.
Brazil's digital payments leader goes on sale
Nicholas Rossolillo (StoneCo): Brazil's leading digital payments processor, StoneCo -- often compared to Square here in the states -- is having a rough go of things this year. Shares are down 45% through the first eight months of 2021 and down 10% from a year ago.
Nevertheless, the most recent slide comes following Stone's second-quarter earnings update. The core business is booming, but the pandemic continues to take a toll on Brazil's economy. In tandem, Brazil is updating its rules and regulations determining digital payments and issuance of credit to businesses. It's this digital credit system change that led to an 8% year-over-year decline in Stone's Q2 revenue to 613 million reais (about $119 million). As a result of changes to how credit is issued in Brazil, and malfunctioning of the new credit registry system, Stone decided to temporarily freeze its credit segment for its merchants. This pause is expected to last three to six months.
The temporary loss in revenue hurts, but Stone's core payments platform is doing just fine. Total payment volume increased 59% year over year, and revenue excluding the credit division rose 68%. The acquisition of small business software company Linx was also completed in July, further enhancing the long-term growth potential Stone has as it helps get South America's largest economy up to speed with the digital times.
After the steep tumble in share price, Stone is valued at about 24 times trailing-12-month sales -- still a premium price tag, but not totally unreasonable given how fast the company's primary business is growing and the potential the merger with Linx presents. For investors looking for a company with massive potential but who don't mind big swings in valuation, Stone is still a top-notch option within the fintech stock universe.
This fintech player is leading an emerging industry
Keith Noonan (Workiva): Publicly traded companies need to abide by precise reporting standards, and Workiva makes it easy to meet those requirements and fulfill other data sharing and compliance needs. The company's cloud-based software plugs in data from the necessary sources in order to update reporting and accounting info, thereby automating processes that can otherwise leave greater room for errors or potential abuse. It also helps companies share, organize, and analyze data across a huge variety of sources.
For companies that want to list on major exchanges and remain in the good graces of the Securities and Exchange Commission, Workiva has established itself as an early leader in the category. European markets are adopting SEC-like digital reporting and enterprise data-sharing requirements, which could pave the way for a major new growth opportunity, and the company also provides reporting solutions for private companies.
The idea of simplifying complex, often arduous, processes and taking elements of risk out of the equation has a lot of inherent value. 75% of Fortune 500 companies are already using the company's services, and Workiva should be able to continue delivering strong performance so long as it retains a leadership position in its relatively niche service categories.
Even better, the fintech specialist will have opportunities to continue expanding its service catalog. Leveraging its existing reporting, compliance, and data-sharing software foundations should help it bridge users into new offerings that will increase average spending per customer.
This is an industry-shaping company that has had its finger on the pulse of emerging trends in the enterprise software and data analytics industries. With a market cap of roughly $7.2 billion and a multitude of unfolding long-term growth opportunities, Workiva has serious multibagger potential.
The sky is the limit for this cryptocurrency bank
Bram Berkowitz (Silvergate Capital): Ever since cryptocurrency prices began to soar last year, the stock price of Silvergate Capital has followed suit and is now up more than 664% over the last year. While the company is technically a bank, it is anything but your traditional lender.
Several years ago, management at Silvergate Capital realized that cryptocurrencies would one day become a popular investable asset. That led it to build an in-house payments system at the bank called the Silvergate Exchange Network. SEN is a payments network that can clear transactions in U.S. dollars any time, 365 days a year, between two users in the network, which is great for institutional crypto traders and crypto exchanges because cryptocurrencies trade around the clock.
Silvergate doesn't actually hold any cryptocurrencies on its balance sheet, but the unique and efficient payments system lures many institutional traders and exchanges that bring large sums of zero-cost, sticky deposits with them. This characteristic has given Silvergate one of the strongest deposit bases in all of banking -- the bank practically pays zero interest on its entire deposit base. As a bank, Silvergate is also able to cross-sell other fee income banking products to customers on SEN. The network also gets more attractive for other clients to join as it grows.
Banking crypto clients and helping facilitate their transactions could just be the beginning for SEN. Earlier this year, Silvergate announced that it would become the exclusive issuer of Facebook's Diem U.S. dollar stablecoin, which is a digital asset that will be pegged to the U.S. dollar. Management says that it will make money on Diem through transaction fees on the minting and burning of the stablecoins, yield on the reserve deposits that back the stablecoin (and which Silvergate will manage), and a new customer segment that Silvergate can sell traditional banking services to.
Silvergate Capital does not trade cheap on a price-to-earnings basis or in terms of price-to-tangible book value, but when you consider the strength and potential of its existing business, and the future of stablecoins at the bank, it's hard not to be excited.