Growth stocks have been enjoying a rebound in 2023 -- the tech-heavy Nasdaq Composite index has jumped by close to 30% year to date. That sharp reversal has been a breath of fresh air for investors who saw growth stocks fall across the board last year as the pandemic-era surges in demand for their offerings began to dissipate. Yet despite this general recovery, investors still need to be careful not to pick stocks that may see their growth lose steam.
It is important to apply filters to ensure that you buy stocks with characteristics that give them the potential to do well in the long run. The attributes to look for include a strong growth track record, catalysts that can help the business to sustain its momentum, and a large and expanding total addressable market. Selecting stocks with such characteristics gives you a much better chance of seeing your portfolio's value increase significantly over the years.
Here are three such growth stocks whose share prices could be on the cusp of soaring.
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Zscaler
Zscaler (ZS +2.13%) offers a valuable service to organizations by protecting them from cyberattacks and keeping their systems and data safe. Its platform is distributed across 150 data centers globally, and the company touts itself as the world's largest in-line cloud security platform. Its revenue jumped from $431.3 million in its fiscal 2020 (which ended July 31, 2020) to $1.09 billion in its fiscal 2022. Even better, the company's free cash flow generation also improved from $27.5 million to $231.3 million over the same period. That momentum has carried over into the current fiscal year, with Zscaler seeing a 50.3% year-over-year jump in revenue to $1.16 billion for the first nine months. Free cash flow continued to improve, climbing 48.4% year over year to $232.3 million for the period.
NASDAQ: ZS
Key Data Points
Aside from its impressive financials, the cybersecurity company has also been steadily growing its customer base. Customers providing more than $1 million in annual recurring revenue (ARR) shot up from just 288 in the third quarter of fiscal 2022 to 400 in fiscal Q3 2023. What's more, 35 of these customers are delivering ARR exceeding $5 million.
Zscaler's patented software engine allows for quick and easy scans and internet traffic inspection without impacting customer performance. The company believes that it enjoys a serviceable addressable market of $72 billion, and increasing cybersecurity needs could open up greater long-term opportunities. Its current target market comprises 335 million serviceable users, but this could potentially increase to more than 600 million users if third-party vendors and customers of customers are included. These numbers imply that the business still has significant room to increase its top line.
Toast
Restaurant owners will appreciate the services that Toast (TOST +2.51%) offers on its cloud-based platform. Toast provides technology and software that helps food and beverage businesses run more efficiently, covering aspects such as points of sale, operations, digital ordering, and marketing.
Its revenue more than tripled from $823 million in 2020 to $2.7 billion in 2022, led by sharp growth in financial technology solutions revenue. In the first quarter of 2023, revenue surged by 53% year over year to $819 million, and gross payment volume (GPV) increased by 50% year over year to $26.7 million.
NYSE: TOST
Key Data Points
Toast's software has also been installed in many more locations -- in Q1 2023 alone, it added 5,500 net new locations, taking its total to around 85,000, up 37% year over year. The company is also seeing its customers make use of more modules of its software: 42% now use six or more elective products compared to just 21% two years ago.
Toast's value proposition is simple yet effective: When its clients (and their employees) are happy, it creates a positive feedback loop that allows restaurants to be more successful and profitable, thus giving them more funds to channel toward increasing service quality and enhancing loyalty. The company recently rolled out a waitlist and reservation system called Toast Tables that simplifies and streamlines table management, which further enhances its software. Toast sees a total addressable market of $55 billion for restaurant technology spending in the U.S. alone. If it accounts for the rest of the world, that addressable market doubles to $110 billion or more.
Confluent
Confluent (CFLT +0.00%) runs a cloud platform that collates data from various sources in real time to derive insights that businesses can use. It serves a wide range of industries including retail, healthcare, transportation, and telecommunications, and can deploy its Apache Kafka platform on any platform, on-premise site, or cloud.
Its revenue growth has been impressive, expanding at an annualized rate of 72% from $65.2 million in 2018 to $585.9 million in 2022. Cloud revenue has grown at an even more rapid clip of more than 200% per annum from just $2.6 million to $211.2 million over the same period.
NASDAQ: CFLT
Key Data Points
In Q1 2023, Confluent's revenue jumped 38% year over year to $174 million, with remaining performance obligations up 35% year over year to $743 million. Although its number of customers only rose 14% year over year to 4,690, the important metrics to look at are for its customers with higher ARR. Customers with more than $100,000 and $1 million in ARR jumped 34% and 53% year over year, respectively, to 1,075 and 135. Confluent estimated that its total addressable market stood at $60 billion last year, and it expects that will grow at 19% per annum to reach $100 billion by 2025. With an annualized revenue run rate of just $700 million, the data management software company has a significant runway to further grow its customer base and top line.
