Growth stocks fell hard over the past couple of years. Equity markets have been kinder to them in 2023, but many remain firmly in the red compared to their mid-2021 levels. While it isn't ideal, investors can take solace in the fact that some growth stocks boast massive upside potential after the dives they took over the past two years. Initiating positions in some of these companies today could lead to excellent returns over the long run.
Let's consider two growth stocks poised to make sustained runs: Veeva Systems (VEEV 1.02%) and Adyen (ADYE.Y 1.97%).
1. Veeva Systems
Veeva Systems is a cloud computing specialist that provides software solutions to life sciences companies. This laser focus on a specific niche has been one of Veeva's strengths. While there are plenty of competing cloud computing providers, few have solutions tailored to the needs of the highly regulated and capital-intensive life sciences sector.
The California-based company has developed a solid reputation in this niche, and as a result, it has attracted the business of many of the largest pharmaceutical and biotechnology companies. It has generally enjoyed strong revenue and earnings growth. However, a slowdown in its top-line growth over the past year -- coupled with a high stock valuation -- led to its poor share price performance.
VEEV PE Ratio data by YCharts.
However, Veeva Systems' latest quarterly update -- for the first quarter of its fiscal 2024 -- impressed investors. During the period, which ended on April 30, revenue rose by about 4% year over year to $526.3 million. The company's adjusted net income was 7% lower than the year-ago period at $147.9 million. Those results topped analysts' consensus estimates, and the company also provided better-than-expected guidance for the rest of its fiscal year.
Veeva Systems expects revenue of $2.36 billion to $2.37 billion for the year. But the company sees a massive $13 billion addressable market at its disposal, so there is plenty of growth potential.
Meanwhile, its business benefits from high switching costs. For a client to migrate to another cloud-based software provider could be expensive and time-consuming, slow business, and potentially lead to the loss of critical data. These companies generally won't risk doing that unless they feel that they have to, which shouldn't happen if Veeva Systems continues to serve the needs of its customers, just as it has in the past.
And while the stock remains richly valued, its price-to-earnings and price-to-sales ratios are near the low end of their three-year averages. Veeva Systems has generally justified its valuation by providing market-beating returns. Its outlook for the next year, its long runway for growth beyond that, and its solid competitive advantages should help it sustain its recent stock price gains.
2. Adyen
Netherlands-based fintech company Adyen provides valuable services to businesses, especially those operating across many regions internationally. It offers a single platform that integrates with dozens of digital payment methods that are popular in various parts of the world.
Many multinational corporations that employ Adyen's services would otherwise have fragmented payment platforms to accommodate users in the various regions where they do business since people in different countries have varying payment preferences.
Inflationary pressures last year did no favors to the company's expenses. But instead of slashing its workforce like many of its peers, Adyen has been hiring, and expects to continue to do so. Why? The company is prioritizing long-term growth. So even as inflation continues to ease, Adyen's expenses will likely keep rising.
Here's why I don't think that's a problem: Adyen's revenue growth continues to be impressive. In 2022, the company's processed volume increased by 49% year over year to 767.5 billion euros, while its net revenue was up 33% to 1.3 billion euros. And that was with some disruption in Europe related to the war in Ukraine. Adyen projects that in the medium term its revenue will grow at a compound annual rate in the mid-20% to low-30% range.
While its bottom line might suffer as it grows its workforce and compensation expenses, management sees plenty of exciting opportunities, and pursuing these should yield positive results down the road. For instance, the company has sought to grow its business outside of Europe, especially in the U.S.
Adyen's stock does look pricey, but the valuation has receded a fair amount thanks to last year's bear market.
ADYEY PE Ratio data by YCharts.
Adyen's stock has been performing better since the start of the year. In my view, the company is well-positioned to maintain this momentum throughout 2023 and beyond.
