The best investments are lifelong compounders -- stocks that have the potential to grow several-fold over time. Nearly every powerful brand and influential company started out as a far smaller entity. But a balance of time, execution, differentiation, innovation, and luck can lead to seemingly unfathomable growth.
ChargePoint Holdings (CHPT +6.68%) and QuantumScape (NYSE: QS) are two mid-cap stocks worth considering, whereas PTC (PTC +0.72%) is a large-cap stock that offers a more moderate risk profile. Here's why each growth stock is worth a look now.
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Give your portfolio a jolt with ChargePoint
Daniel Foelber (ChargePoint): ChargePoint stock is within 20% of its all-time low, is down 31.3% in the last year, and is down over 80% from its all-time high.
NYSE: CHPT
Key Data Points
Like many companies that went public in 2020 and 2021, ChargePoint was part of the infamous class of special purchase acquisition companies, or SPACs. Many companies that went public via SPAC are unprofitable growth companies that have a lot of potential to compound returns over time, but also a lot of risk. And ChargePoint is no exception.
However, ChargePoint does have a lot of things going for it -- namely that it's a growing business and isn't terribly expensive, sporting a 5.8 price-to-sales ratio. The company specializes in alternative current (AC) Level 2 chargers for homes, businesses, and fleets. These chargers are quite a bit different than a Tesla (TSLA +0.97%) supercharger, which is a direct current (DC) fast charger focused on speed. An AC charger is practical when time isn't of the essence, such as overnight charging or charging while you're shopping, at a coffee shop, at the grocery store, etc.
ChargePoint and many other pure-play electric vehicle (EV) charging stocks have gotten a lot of flak lately, and for good reason. Tesla opened its supercharger network to other automakers. And many automakers are investing in their own EV charging networks, and even integrating EV charging at dealerships.
ChargePoint remains cash-flow negative and unprofitable. But its charging network has more than doubled over the last three years. The idea is to land as many customers as possible and then achieve profits with scale. The issue is that the business is unproven, and margins could be squeezed given all the competition.
Yet in a world where EV adoption steadily rises for decades to come, ChargePoint looks like a standout company.
The investment thesis for ChargePoint is grounded in the eventual profitability of its business model, rising EV adoption, and the fact that ChargePoint is a pretty small company given the scale of its network, with a market cap of just $3 billion.
ChargePoint is one of those companies that has what it takes to compound gains for decades to come, or lose market share and eventually get acquired or flat-out fail. For that reason, it's important to approach a stock like ChargePoint with caution -- even though the stock has sold off considerably.
QuantumScape could power impressive returns in 2023
Scott Levine (QuantumScape): While shares of QuantumScape are up big so far in 2023 -- about 77% as of this writing -- it's important to recognize that the stock has still failed to fully rebound to where it was shortly after it appeared on the public markets following its SPAC merger in late 2020.
NASDAQ: QS
Key Data Points
Since then, the solid-state battery stock is down about 54% -- but while it's down, it's certainly not out. There is ample opportunity for the company to report news in 2023 that drives investors back to powering their portfolios with QuantumScape.
Between faster charging times and longer battery life, the allure of solid-state batteries is simple to understand. And with demand for EVs expected to grow sharply in the coming years, it's no wonder that investors have taken a keen interest in QuantumScape. The problem is that it's unclear whether the mass production of solid-state batteries can be achieved. But QuantumScape has made progress in assuaging the concerns of skeptics.
In the coming months, QuantumScape has an opportunity to further convince investors that it's on track to achieve commercial production of its solid-state batteries. The company has been developing a pre-production line, dubbed the QS-0, to demonstrate the feasibility of commercial production.
Seeking to advance the development of the QS-0 line, QuantumScape is working to complete the installation of new equipment for the line in 2023, as well as qualify the equipment. If it achieves these feats, the company plans to commence initial production of battery cells from QS-0 this year.
Should the company succeed in these endeavors -- demonstrating that it's making substantial progress toward commercial production -- the stock could soar. Similarly, if QuantumScape secures additional customers beyond the six original equipment manufacturers awaiting battery cells from QS-0, shares could also jump higher.
Despite the potential for this stock to double, investors should certainly be cognizant of the potential pitfalls; consequently, it should only remain a consideration for those comfortable with a higher-risk investment.
PTC is about to start generating some serious cash flow
Lee Samaha (PTC): Suggesting a stock could double is no small claim, but I think there's a good reason this one could get there over the next few years. The stock is a play on the digital transformation of the manufacturing world. The company offers a range of software solutions that help create and design products and manage their lifecycles. In addition, PTC's Industrial Internet of Things (IIoT) connects its customers' physical assets to the digital world, and its augmented reality solutions help digitally deliver critical information to workers.
As previously discussed, PTC is on track to grow its annual run rate (ARR) at a mid-teens annual growth rate from 2019-2023 -- no mean feat in a challenging trading environment. ARR is the critical metric management guides to, as it represents the annualized value of its subscription software, cloud, software as a service, and support contracts. As such, the ARR leads its free cash flow (FCF) generation.
The latter is set to expand significantly in the coming years, with Wall Street analysts expecting $577 million in 2023, $703 million in 2024, and $872 million in 2025. Given that PTC currently trades at a market cap of $16.3 billion, a doubling in its market cap would be around $32.5 billion. If the company meets Wall Street expectations for 2025, then it would need to trade on 37 times its FCF in 2025 to get to a $32.5 billion market cap.
While that might seem excessive, it would only take a few years of mid-teens FCF growth to leave the stock looking like a good value. It's hard to see it doubling by 2025, but it's not hard to see it happen in a five-year timeframe based on its current growth rate. Given the strength of its underlying end markets and the widescale adoption of digital technology, I think it's a good bet to get there.
