Professional money managers can be a great source of inspiration, particularly those that outperform the market. For instance, the S&P 500 rose 68% between Q1 2019 and Q1 2022. But over the same period, Karthik Sarma of SRS Investment Management saw his hedge fund climb 194%, and Alex Sacerdote of Whale Rock Capital Management generated a return of 132%.
Both money managers are clearly doing something right, and investors in search of stock ideas may want to check in on their portfolios from time to time. With that in mind, here are two no-brainer growth stocks Sarma and Sacerdote bought recently.
1. Fiverr International
Sarma started buying Fiverr International (FVRR -0.96%) in the third quarter of 2020, and he has added to the position several times since, including in the first quarter of 2022. As of March 31, the stock was the 10th largest holding in his hedge fund, and it represented about 2% of the portfolio.
Fiverr is a gateway to the gig economy. Its marketplace connects freelancers with businesses, and its catalog of digital services covers hundreds of categories, from 3D design and data analytics to cybersecurity management and video game development.
Like any marketplace operator, Fiverr benefits from a network effect. Each new freelancer brings more expertise to the marketplace, creating value for every business, and each new business brings more purchasing power to the marketplace, creating value for every freelancer.
That virtuous cycle means 4.2 million buyers were active on the marketplace in the first quarter, a figure that has more than doubled in the past three years. Better yet, Fiverr has supercharged its network effect with a broad portfolio of value-added services. That includes marketing and workflow management tools for freelancers, and freelancer management software for larger businesses.
Financially, Fiverr is growing at a rapid clip. Revenue jumped 41% to $316 million over the past year, and free cash flow soared 120% to $38 million.
But the metric that really stands out is take rate, which is revenue as a percentage of total spend. Fiverr posted an astonishing take rate of 29.6% in the last quarter, up more than two percentage points from the prior year. To put that in context, rival Upwork posted a take rate of 14.1% in the last quarter. That big discrepancy highlights the value Fiverr creates for businesses on its platform.
Going forward, investors have good reason to be bullish. Management puts its addressable market at $115 billion, and Statista estimates that more than half of the American workforce will participate in the gig economy by 2027, up from just 38% at the beginning of 2021. With shares trading at 3.6 times sales -- far cheaper than its three-year average of 19 times sales -- this stock is worth buying.
2. Arista Networks
Sacerdote started a new position in Arista Networks (ANET -4.32%) in the first quarter. The stock ranked as the sixth-largest holding in his hedge fund, and it represented 4% of the portfolio as of March 31.
Arista provides networking solutions for private data centers, public clouds, and multi-cloud environments. Its portfolio includes hardware for switching and routing, and adjacent software for network automation, monitoring, and security. But its core innovation is the Extensible Operating Systems (EOS). Legacy vendors often rely on multiple operating systems, but EOS runs across Arista's entire lineup of hardware, making network management less complex.
More broadly, its networking products offer best-in-class capacity, performance, and power efficiency, and Arista is the leader at the high-speed end of the switching market, meaning switches that offer throughput of 100G, 200G, or 400G. That's particularly relevant because the continued adoption of cloud computing and data-intensive applications (think artificial intelligence) will create a need for faster networking solutions over time.
The effects of that tailwind are already evident in Arista's consistently solid financial results. Revenue climbed 28% to $3.2 billion over the past year, and free cash flow rose 16% to $904 million. But management puts its market opportunity at $35 billion by 2025, meaning the company has plenty of room for future growth. And with shares trading at a reasonable 10.3 times sales, this stock looks like a no-brainer buy right now.
