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2 Top Growth Stocks to Buy Right Now

By Trevor Jennewine – Oct 20, 2021 at 8:10AM

Key Points

  • Growth stocks have outperformed value stocks over the long term.

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Shareholders of Intuit and Square should be well rewarded in the years ahead.

Over the last 15 years, growth stocks in the S&P 500 index have produced an average annualized return of 12.8%, crushing the 7.5% average return seen in value stocks. Of course, diversity is an important part of any portfolio, but this data suggests that at least some of your funds should be allocated toward growth, especially if you are still a decade (or more) from needing those funds for other things.

Building on that idea, growth stocks Intuit (INTU -1.46%) and Square (SQ -4.82%) provide valuable digital financial services to a range of customers, and both look like smart places to put your money right now.

Here's why.

Investor drawing charts and graphs.

Image source: Getty Images.

1. Intuit: The gold standard in accounting software

Intuit may not be the most exciting growth stock, but over 110 million individual consumers, entrepreneurs, and tax professionals rely on its software products, which comprise a portfolio of industry-leading brands.

For example, its QuickBooks software offers a suite of accounting tools that help small-business owners and self-employed individuals track income and expenses, send invoices, and pay bills. Intuit currently holds 62% market share in this sector, making it the top player by a wide margin. Intuit's TurboTax is also the most popular tax preparation software in the U.S., with 73% market share in 2021, up 10% from 2019.

To reinforce this advantage, Intuit is focused on infusing its products with artificial intelligence to automate, predict, and personalize the experience for users. For instance, the company uses an AI technique known as knowledge engineering to convert tax regulations into computer code, and it relies on AI-powered chatbots to answer tax and accounting questions. In both cases, this makes Intuit's business more efficient.

Building on that, the company has added live versions of TurboTax and QuickBooks to its lineup, meaning users can now interact with tax and accounting professionals in real time. These services help clients make complicated financial decisions with confidence. Management believes live software products will be a significant growth driver in the years ahead.

Financially, Intuit has executed well over the last three years, growing its top and bottom lines at a steady clip.

Metric

Q2 2018 (TTM)

Q2 2021 (TTM)

CAGR

Revenue

$6.0 billion

$9.6 billion

17%

Free cash flow

$2.0 billion

$3.1 billion

16%

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

One thing I really like about this company is its recent acquisition of Credit Karma. This move brings 121 million new users to its platform, and it will allow Intuit to build an AI-powered financial assistant that connects consumers with a range of personalized financial products, like credit cards, personal loans, and insurance.

Looking ahead, management believes the Credit Karma acquisition adds $85 billion to its addressable market, bringing the total to $260 billion. That leaves Intuit with plenty of room to grow its business. And given its strong competitive position, I think this stock offers significant upside for shareholders.

2. Square: The disruptive fintech company

Square provides financial tools to both merchants and consumers, making it less costly and less complex to participate in the economy. Its Seller ecosystem comprises hardware, software, and services that help businesses manage sales across brick-and-mortar locations and digital storefronts. And its Cash App ecosystem provides access to direct deposit, brokerage, and debit card services, enabling individual consumers to manage their finances from a single location.

Generally speaking, Square's comprehensive approach has led to strong growth in both ecosystems. For instance, its broad portfolio of software solutions, which range from point-of-sale to payroll, has helped Square gain traction with larger businesses (i.e. sellers generating over $125,000 in gross payment volume or GPV). During the most recent quarter, this cohort accounted for 65% of GPV, up from 55% in 2019. That's encouraging since Square generates revenue by taking a percentage of GPV.

Also noteworthy, the Cash App has seen strong growth in recent years as new services have supercharged user engagement. In the first quarter, Cash Card spend jumped 150%, as weekly active users nearly doubled year over year. And in the second quarter, 4.5 million consumers held a stock or ETF in the mobile app, triple the total from the previous year. This uptick in engagement has made the Cash App more profitable, as the gross profit per monthly active user reached $55 in the recent quarter, 2.5 times higher than it was in 2019.

Financially, Square has delivered an incredible performance over the last few years.

Metric

Q2 2018 (TTM)

Q2 2021 (TTM)

CAGR

Gross profit

$1.0 billion

$3.7 billion

55%

Free cash flow

$71.2 million

$682.8 million

112%

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

Square recently announced its intention to acquire Afterpay, a buy now, pay later (BNPL) company that provides interest-free consumer financing at checkout. Despite a hefty $29 billion price tag, which Square plans to fund with stock, this move could be a significant growth driver for the company.

BNPL services tend to boost the number and size of transactions for merchants, meaning Square's Seller ecosystem should benefit from an uptick in GPV. At the same time, the Cash App will serve as a payments platform for BNPL purchases and a merchant discovery tool for consumers, both of which should boost overall engagement.

In short, Square's disruptive approach to finance has garnered a growing user base, and management is still growing the business in new directions. That's why this stock looks like a smart buy right now.

Trevor Jennewine owns shares of Square. The Motley Fool owns shares of and recommends AFTERPAY T FPO, Intuit, and Square. The Motley Fool has a disclosure policy.

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