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2 High Growth Stocks to Buy Before They Explode

By Harsh Chauhan – Updated Sep 22, 2021 at 9:01AM

Key Points

  • Chewy and GoPro have underperformed the broader tech sector this year.
  • A jump in customer spending and the growth of the online pet retail market will be tailwinds for Chewy stock.
  • GoPro's remarkable turnaround looks set to continue thanks to its direct-sales model and the growth of its subscription business.

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These companies could soon switch into higher gear on the stock market.

The technology sector has turned out to be a happy hunting ground for investors this year, and the NASDAQ-100 Technology Sector index has jumped over 20% in 2021. But there are a few companies that have failed to match the broader market's rally despite registering solid growth in recent quarters.

Chewy (CHWY 2.83%) and GoPro (GPRO -1.09%) are two stocks that have underperformed the market even though they have been delivering eye-popping growth.

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However, these high-growth companies could switch into higher gear soon. Let's see why.

1. Chewy

Chewy is an online retailer of pet food and supplies that was in fine form on the stock market last year as the novel coronavirus pandemic forced people to stay home. Pet parents started going online to procure food and other supplies, and Chewy benefited from that trend. However, the company's recent results were a whisker below expectations, and investors pushed the panic button.

That wasn't surprising, as there have been worries about the sustainability of Chewy's growth in a post-pandemic world. But Chewy's numbers and the prospects of the online pet retail industry indicate that it is built for multi-year growth.

Man looking at a line chart on a laptop.

Image source: Getty Images

For instance, the company's active customer count swelled 21.1% year-over-year in the second quarter of fiscal 2021 that ended on Aug. 1. Net sales per active customer increased 13.5% year-over-year to $404, which was the largest sequential and year-over-year increase in Chewy's history. These numbers indicate that the lifting of COVID-19 restrictions in the U.S. hasn't thrown a spanner in Chewy's growth.

In fact, Chewy has acquired 20% more new customers in the first half of fiscal 2021 compared to the first half of 2019, indicating that the online pet retail industry's secular growth continues to be a tailwind in a post-COVID scenario. Additionally, Chewy claims that its revenue retention historically exceeds 100%, as it has been able to drive more spending from customers. This is evident from the sharp increase in net spending per active customer last quarter.

Chewy's customers tend to spend more money as they spend more time with the company. Specifically, Chewy data suggests that customers tend to spend $400 in their first year with the company, $700 in the fifth year, and nearly $900 in the ninth year. With the company now having 20 million customers, Chewy's sales are likely to keep heading north in the coming years as customer spending increases.

Additionally, the size of the online pet industry in the U.S. will likely continue to grow at an impressive pace in the future. According to the American Pet Products Association, pet parents are on track to spend nearly $110 billion on pets this year. Packaged Facts estimates that e-commerce will account for 53% of pet products sales in 2025, up from 30% last year.

With Chewy holding 41% of the online pet retail market, it is in a solid position to take advantage of the huge end-market opportunity, which makes it a top e-commerce stock to buy. The valuation adds to the bull case, as the stock is trading at 3.8 times sales right now, which is a discount to last year's multiple of 5.62. As Chewy looks capable of sustaining its high levels of growth, buying the stock at its current valuation may turn out to be a prudent long-term move.

2. GoPro

GoPro has executed a remarkable turnaround compared to where it was three years ago, driven by a shift toward a direct-to-consumer sales strategy and the fast-growing subscription business. The action camera specialist reported an 86% year-over-year jump in revenue in the second quarter of 2021 to $250 million. The company's adjusted gross margin jumped 850 basis points over the prior-year period to 40.1%.

The terrific revenue and margin jump helped GoPro swing to an adjusted profit of $0.12 per share in Q2 compared to a loss of $0.20 per share in the year-ago period. But the market hasn't rewarded GoPro's outstanding performance in 2021, as its stock price shows.

However, that may not be the case for long, as GoPro is pulling all the right strings to ensure that it keeps up its impressive pace of growth. For one thing, the company has been able to drive more spending from customers, as the growth in its average selling price (ASP) shows. GoPro exited the second quarter with an ASP of $345, a 15% jump over the prior-year period. It sold 820,000 cameras, which was a 10% increase over last year. Cameras priced above $300 accounted for 94% of the company's total camera revenue last quarter.

It is also worth noting that GoPro's subscription business is growing at a tremendous pace. Subscribers to the company's cloud-based storage solutions, the Quik video editing application, and the GoPro mobile application increased 211% year-over-year in Q2 to 1.16 million. The company's subscription revenue increased to $11.6 million during the quarter from $4.7 million a year ago.

Now, that's just 4.7% of the company's total revenue, but investors shouldn't forget that GoPro expects to end the year with 1.7 million subscribers. What's more, the company is targeting annual recurring subscription revenue of $90 million at the beginning of 2022 with margins expected to land between 70% and 80%.

GoPro's robust business momentum in 2021 has encouraged the company to increase its revenue growth guidance to a range of 25%-30%, up from its prior range of 20%-25%. The company's full-year earnings are expected to jump from just $0.08 per share in 2020 to $0.76 this year.

With such terrific growth in the cards, buying GoPro stock right now is a no-brainer -- it is trading at 26.5 times trailing earnings and just 8.7 times forward earnings. These multiples are a discount to the S&P 500's price-to-earnings ratio of 31.

Finally, the action camera market's revenue is expected to triple in the next eight years to $10 billion as per a third-party estimate, which is nearly 10 times GoPro's trailing-twelve-month revenue of $1.09 billion. GoPro's recent results suggest it is on its way to making the most of this opportunity, with a subscription business that should create a loyal customer base, making it an ideal tech stock to buy to take advantage of a lucrative opportunity.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Chewy, Inc. The Motley Fool has a disclosure policy.

Stocks Mentioned

GoPro Stock Quote
$5.42 (-1.09%) $0.06
Chewy Stock Quote
$44.35 (2.83%) $1.22

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

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