Hypergrowth is a very specific part of an emerging company's history. This the steepest bit of the S-curve, after setting up a promising business plan but before it matures and slows down. It's rarely a lonely journey. In most cases, you're looking at a new or rejuvenated industry where several competitors are pulling every available lever to build a large market share of a new long-term business opportunity.
It's an exciting growth phase, but also a risky one. For every sustained winner, you'll see several has-beens or also-rans that never make it to the finish line. So if you're investing in hypergrowth stocks, you can't just bet on the hottest name of the season. The first step does not involve finding the highest possible rate of sales growth, but the most robust plan for pushing through the hypergrowth era and thriving as the high-octane sales growth matures into a robust market for the long haul.
On that note, I have found a couple of legit hypergrowth stocks with solid bottom-line profits and convincing business strategies. I can't promise that all of them will earn their wings and become familiar household names in the next couple of years, but I like their prospects. Furthermore, it's a diverse group that provides the magic of diversification. One big winner can make up for several unsuccessful investments, and then some.
Payroll processing isn't boring to Paycom's shareholders
The cloud-based human resources management and payroll processing tools from Paycom Software (PAYC 1.89%) are all about simplification. The highly automated software relies on artificial intelligence and machine learning. Those red-hot buzzwords of 2023 are also serious business tools with the ability to remove human error from complex processes such as payroll and workforce management.
Computer-assisted payroll and HR software is a thriving market with several successful competitors, as expected. Paycom is not the largest name in this sector, but it is growing both top-line sales and bottom-line profits faster than its chief rivals, Workday and Automatic Data Processing.
Yes, the company is both fast-growing and firmly profitable. In fact, Paycom converted 17% of its incoming revenues into free cash flow profits over the last four quarters, and the trend lines are pointing upward:
PAYC Revenue (TTM) data by YCharts
Operating from this rock-solid financial platform, Paycom is well-equipped to gain market share while expanding its product portfolio. Management believes that Paycom controls just 5% of the total addressable market so far, leaving lots of room for continued growth. And the international expansion has only just begun. I don't see why Paycom's intuitive and powerful systems shouldn't appeal to European or Asian clients, too.
Finally, Paycom's formerly high-flying stock currently trades more than 50% below the all-time highs on November 2021. If you were interested in this stock back then but discouraged by its lofty valuation, the current combination of lower share prices and richer profits may have opened a buying window for you.
All in all, Paycom is a high-quality business right in the sweet spot of thrilling hypergrowth and reliable profits. What's not to love?
Online learning is a win-win-win for Docebo's investors, client companies, and end users
Let's move on to Docebo (DCBO -0.79%), a Canadian company that offers cloud-based training services for corporate learning. Like Paycom, Docebo makes good use of automation and artificial intelligence.
Yeah, I know it sounds like a snore, but stick with me, it's important stuff. Did you know that companies that keep teaching their employees new things tend to have happier, more productive workers? Happier workers tend to deliver better results in their daily work and are also less likely to leave the company. That's a win-win scenario. Docebo's services are designed to deliver these benefits to its client companies and their employees.
Its AI tools can whip up training courses from existing company documents and resources, tailoring the learning experience to fit each worker. Even better, Docebo lets companies work training right into their daily tasks, so it's like learning on the job without even knowing it.
And just like Paycom, Docebo pairs its surging sales with robust bottom-line profits. Mind you, the company is putting its back into sustained growth efforts. In last week's first-quarter report, Docebo spent 18% of the incoming revenues on research and development. The sales and marketing budget was even beefier, consuming 40% of Docebo's revenues.
So the company is pushing the pedal to the metal, but with enough fiscal discipline to leave some room for a reasonable profit margin. Stop me if you heard this a minute ago, but Docebo's stock price sits 65% below its all-time high and the stock is unusually affordable nowadays. It's another case of a marketwide flight from risky and expensive stocks, resulting in another generous price cut even as Docebo's business continues to boom.
Gravity: Korean video games for fun and profit
Finally, let me introduce you to Gravity (GRVY 1.76%). Not the all-too-familiar force of nature that holds the planet and the universe together, but the South Korean video game developer.
Gravity's flagship franchise is Ragnarok, a series of massive multiplayer online role-playing games (MMORPG). Ragnarok's characters and universe have spawned successful games across the leading mobile platforms, PC systems, and browser-based experiences. There are even metaverse versions of Ragnarok in the works, tapping into the Sandbox (SAND -1.04%) metaverse with support for in-game non-fungible tokens (NFTs) and other blockchain-powered features.
I hope I'm not boring you with these consistently positive business results, but Gravity's first-quarter sales nearly doubled year-over-year alongside a 22% net profit margin. Yep, those business trends should remind you of Docebo and Paycom. And the stock price correction amid last year's inflation panic was even harsher; Gravity's share price is down 75% from the all-time highs of late 2021.
Like Paycom and Docebo, Gravity presents a remarkable blend of exponential growth, bottom-line profitability, and a greatly discounted stock price. In the often unpredictable sea of hypergrowth investing, these three stocks offer an island of well-managed opportunity.
