2 Growth Stocks That Are Beating Warren Buffett This Year

Warren Buffett is widely recognized as one of the world's great investors, and rightly so. Under his leadership, Berkshire Hathaway (BRK.A 1.24%) (BRK.B 1.33%) rewarded shareholders with a 20% annualized return between 1965 and 2020, doubling the average performance of the broader market. And so far this year, the stock price is up 22%, outpacing its own historical growth.

Because of this steady growth, Berkshire has become too big now to buy stock in relatively small companies and still see a noticeable effect on its own stock price. Even if it bought those companies outright, the added revenue they would provide likely wouldn't be enough to move the earnings needle much for this giant conglomerate. That means there are plenty of worthwhile stocks that are just too small at the moment to attract Buffett and Berkshire's attention.

Here are two great examples.

Image source: Getty Images.

1. Cloudflare: Stock price is up 73% year to date

Cloudflare's (NET 3.30%) mission is to build a better internet. To that end, the company provides cloud infrastructure and networking services, helping clients accelerate and secure business-critical applications, websites, and data.

For example, Cloudflare One is a secure access service edge (SASE) cybersecurity concept designed to modernize the corporate network, enabling clients to safely access internal resources and the open internet from any device or location. And Cloudflare CDN is a content delivery network that allows clients to serve applications and websites quickly and securely, creating a high-quality user experience.

Unlike many rivals, Cloudflare offers a free tier of service. This allows potential customers to try a product before making a purchase, but it also boosts the amount of internet traffic handled by its network. In fact, over 17% of the internet relies on Cloudflare for content delivery -- the next closest service is Fastly at just 1.3%.

That scale makes Cloudflare a valuable partner to Internet Service Providers (ISPs). In fact, ISPs allow Cloudflare to place equipment directly in their data centers, reducing the company's bandwidth and co-location expenses (i.e., fees charged for data transfer and server storage). This gives Cloudflare a cost advantage.

More importantly, Cloudflare's global network addresses one of today's hottest issues: digital transformation. And the company's extensive product portfolio has helped it add new paying customers at an impressive pace, driving strong top-line performance over the last three years.

Data sources: Cloudflare SEC filings, YCharts. TTM = trailing 12 months. CAGR = compound annual growth rate.

Currently, management puts Cloudflare's market opportunity at $100 billion by 2024. That leaves the company with plenty of room to grow. And given its strong financial performance, the founder-led management team is clearly executing on that opportunity. The market is aware of this performance and has pushed the stock price up 633% since the stock went public two years ago, including a gain of 73% this year.

Going forward, investors should look for that momentum to continue. Despite trading at an outrageously pricey 76 times sales, Cloudflare has already achieved impressive scale. Given that advantage, I think this stock will continue to beat the market (and Buffett) in the years ahead, though I wouldn't go all-in at the current share price. Dollar-cost averaging may be a good option here.

2. MongoDB: Stock price is up 36% year to date

A database sits at the heart of every application. This is where information is stored, accessed, and processed. For that reason, a database governs the performance, scalability, and reliability of software. And legacy solutions -- which use a relational model to store data in structured tables -- were not built for the volume or variety of modern data, the vast majority of which is unstructured (i.e., it doesn't fit neatly into tables).

To solve this problem, MongoDB (MDB 2.39%) built a document database that allows clients to quickly store large amounts of unstructured data. On the back end, this model provides developers with more flexibility, allowing them to build software more quickly. It also improves performance on the front end, creating a better user experience. In short, MongoDB was built to support modern applications, from e-commerce marketplaces to gaming platforms.

As a result, it has become the most popular general-purpose database by a wide margin, according to DB-Engines. And that advantage helped MongoDB deliver a strong financial performance over the last three years.

Data sources: MongoDB SEC filings, YCharts. TTM = trailing 12 months. CAGR = compound annual growth rate. Note: Q2 2022 ended July 31, 2021.

Looking ahead, the International Data Corp. values the database software market at $106 billion by 2024, creating a massive opportunity. And management is executing on a strong growth strategy.

Specifically, MongoDB Atlas -- a fully managed cloud database -- is gaining traction with clients. This solution further reduces cost and complexity, allowing developers to build applications without worrying about the underlying infrastructure. In the most recent quarter, Atlas revenue surged 83%, outpacing total sales growth by a wide margin.

Given MongoDB's competitive position and strong financial performance, I'm not surprised the stock price is up 36% this year, though the majority of those gains came recently, as shares popped nearly 30% after the company reported exceptional second-quarter earnings on Sept. 3.

Here's the big picture: Since going public in October 2017, MongoDB has crushed the broader market (and Berkshire Hathaway), rewarding shareholders with a total return of 1,430%. And if the company can maintain its momentum with Atlas, I think this growth stock will continue to beat the market (and Buffett) over the long term, despite trading at a pricey 43 times sales.