Buying and holding shares of growing companies can lead to wealth-building returns. Stocks can be very unpredictable in the short term, but investors can outsmart Wall Street by patiently holding fast-growing companies that have advantages over the competition.
The following companies are not the absolute fastest-growing companies available, but more importantly, they can stick around for a long time and compound shareholders' investment.
1. Nvidia
Nvidia (NVDA 6.18%) stock rocketed higher on strong demand for powerful graphics processors needed to train artificial intelligence (AI) models. After hitting a 52-week low of $108 in 2022, the stock soared nearly 190% higher in 2023.
The chipmaker has been vulnerable lately to a pullback in spending in the data center market, as well as weak consumer spending for expensive gaming GPUs. But the emerging opportunity in AI is proving to be a windfall for the graphics specialist.
Recent estimates by Next Move Strategy Consulting estimated the AI chip market at $28.8 billion in 2022, which is projected to grow to over $300 billion by 2030. Nvidia's most recent earnings report validated that optimistic forecast.
While Nvidia reported a revenue decline of 13% over the year-ago quarter, revenue jumped 19% sequentially over the previous quarter. The consensus analyst estimate currently has Nvidia's revenue growing 59% this year to reach $42 billion, which implies a significant acceleration in top-line growth.
Nvidia stock looks expensive when we look backward at trailing 12-month revenue and earnings. But the stock's forward price-to-earnings ratio of 55 isn't that expensive compared to the company's accelerating momentum, especially considering that AI will be adopted by just about every industry worldwide.
There are a few reasons investors can expect Nvidia to live up to the hype. The company dominates the GPU market on the consumer and enterprise side. It commands more than 80% of the market for AI chips. Because it's so far ahead of other chip companies in the GPU space, it's hard to see Nvidia failing to maintain strong growth for many years.
Another reason investors are willing to pay a premium for the stock is Nvidia's ability to capture the accelerated computing opportunity across chip hardware, systems, software, and data center networking components, where its 2019 acquisition of Mellanox is paying off. Compute and networking revenue grew 21% year over year in the most recent quarter.
Although investors should stay aware of potential competition from tech giants, such as Amazon, that are investing in their own AI chips, Nvidia's dominance and the size of the opportunity warrant at least a small position in the stock.
2. Toast
Another fast-growing business investors might want to consider buying a small position is Toast (TOST 3.42%). The company offers a cloud-based platform that is specifically designed for the restaurant industry. Toast helps restaurant owners manage online delivery, takeout, and other tools to grow their business.
Growth has been phenomenal. The company's revenue has grown over fourfold since 2019 to over $3 billion. In the most recent quarter, revenue grew 53% year over year. These strong numbers, especially in the middle of a choppy economic environment, are certainly pointing to a massive long-term growth opportunity. Toast's footprint across the industry represents only 10% of the total U.S. restaurant population.
Toast recently signed a deal with Marriott to make the platform available to food and beverage outlets within the Marriott service hotels in the U.S. and Canada. Restaurant operators are demanding industry-specific solutions, which is a big opportunity for this relatively small company.
Shopify is no slouch of a competitor in the market for business software solutions, so investors will want to make certain Toast is maintaining a high rate of growth as a sign of a strong competitive position. If revenue growth were to decelerate sharply without a reasonable explanation, such as a severe recession, it might be time to sell. However, the recent deal with Marriott shows that its platform is not easily duplicated.
Toast is not only offering a platform tailor-made for the industry, but most importantly, it is designing features that meet the needs of different kinds of restaurants, which is a key differentiator. Marriott likely chose Toast because of the company's hotel-specific product.
The stock appears deeply undervalued. It trades at a price-to-sales (P/S) ratio of just 3.6, which is a significant discount to other cloud stocks. Even Shopify trades at a P/S ratio of 13.6, and it's not growing nearly as fast as Toast.
