Many hypergrowth stocks lost their luster over the past two years as rising interest rates drove investors toward more conservative investments. That's a prudent move, but some of those stocks might still be potential multibaggers over the long term.
So, if you believe interest rates will stabilize in 2024 as the macro environment warms up, it might be a great time to load up on a few hypergrowth plays. If you aren't afraid of a little near-term volatility, these three stocks deserve a closer look: Paycom (PAYC 1.24%), Pinduoduo parent PDD Holdings (PDD 2.80%), and IonQ (IONQ 9.66%).
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1. Paycom
Paycom was one of the world's first online payroll service companies. It also provides human resource tools for supervising employees, managing expenses, storing digital documents, and analyzing data. Its revenue rose 14% in 2020, even as the pandemic curbed the market's demand for its services, but grew 25% in 2021 and 30% in 2022 as those headwinds dissipated.
Paycom expects its revenue to rise 22% this year, even as inflation, high interest rates, and other macro challenges drive companies to rein in their software spending. However, its business model is arguably better insulated from those headwinds than many other software companies because its tools are still useful for optimizing costs throughout economic downturns.
Paycom's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin rose from 39.3% in 2020 to 42.2% in 2022, and it expects that figure to expand to a midpoint of 42.5% this year.
But despite all those promising signs, Paycom's stock has tumbled more than 40% over the past 12 months. Most of that decline occurred in early November amid concerns that the company was cannibalizing its user base with its newer Beti platform, which provides a better return on investment (ROI) for its clients but generates lower revenues per customer.
However, I believe those concerns are overblown and merely demonstrate that Paycom is evolving with the market and widening its moat. At 16 times this year's adjusted EBITDA, its stock still looks cheap and could head higher in 2024.
2. PDD Holdings
PDD Holdings' Pinduoduo is one of China's largest e-commerce companies, and it's growing much faster than its two main competitors, Alibaba and JD.com. From 2018 to 2022, its annual revenue grew at a compound annual growth rate (CAGR) of 77% in USD terms. Analysts anticipate 80% growth this year. Pinduoduo grew like a weed for three reasons.
First, it locked in China's lower-income shoppers with a discount marketplace that encouraged them to team up on bulk purchases. Second, it capitalized on that growth spurt to build an online agricultural marketplace that cut out middlemen retailers by enabling farmers to ship fresh produce to consumers directly. Lastly, it benefited from China's antitrust crackdown on Alibaba, which made it tougher for its top competitor to gain new merchants and customers with aggressive promotions.
Pinduoduo also turned profitable on a generally accepted accounting principles (GAAP) basis in 2021 as it phased out its lower-margin third-party marketplace, streamlined its spending, and focused on selling higher-margin products. Its net profit nearly quadrupled in 2022, and analysts expect another 59% growth this year.
Pinduoduo's growth rates are astounding for a stock that trades at 23 times next year's earnings estimates, and it could continue to crush analysts' estimates as it expands its cross-border marketplace Temu to reach more overseas shoppers. If that happens, I believe its stock will hit fresh highs in 2024 and beyond.
3. IonQ
IonQ might be a promising play for speculative investors. It aims to miniaturize quantum computers with its "trapped ion" technology that can reportedly shrink the width of quantum processing units from several feet to a few inches.
Whether that technology works as advertised is a hotly debated topic between the bears and bulls. Still, its quantum computing power -- which it serves to its customers as a cloud-based service -- has increased since its public debut last October. Its total quantum computing power, measured in algorithmic qubits, reached its target of 29 algorithmic qubits ahead of schedule in the first quarter of 2023 -- and it believes it can reach 35 in 2024 and 64 in 2025.
In 2022, IonQ generated only $11 million in revenue and racked up a net loss of $49 million. Analysts expect its revenue to double to $22 million this year as it signs more contracts. However, they also expect its net loss to more than triple to $156 million as it expands its quantum computing platform to serve those customers. Based on those estimates and its enterprise value of $2.5 billion, IonQ's stock looks extremely expensive at 114 times this year's sales.
But if IonQ successfully scales up its business, analysts expect its revenue to hit $88 million in 2025, representing a CAGR of 99% from 2022. Therefore, it could still have plenty of room to grow as the nascent quantum computing market expands -- so this might just be a multibagger in the making.
