The U.S. economy ended the third quarter (ending Sep. 30, 2023) with stronger-than-expected growth due to robust consumer spending. While real gross domestic product (GDP) grew year over year by 4.9% in Q3 (the fastest in the past two years), inflation cooled down significantly in October 2023.
Many analysts now believe that the Federal Reserve's interest rate hikes may now pause. With Wall Street seemingly gearing up for a bull rally in the coming months, investors stand to benefit by picking up stakes in attractive growth stocks such as Microsoft (MSFT +0.60%), Roblox (RBLX 0.17%), and Zscaler (ZS +0.26%).
Let's assess these stocks in detail.
Microsoft
Technology titan Microsoft's nearly $13 billion investment in OpenAI, the developer of ultrafamous chatbot ChatGPT, has been a game-changer, enabling the company to infuse its core offerings, such as the Azure cloud-computing platform, Bing search engine, and Microsoft 365 productivity suite, with OpenAI's technology. Microsoft also strategically handled the ouster and return of OpenAI's CEO Sam Altman. Subsequently, the company has now taken a non-voting, observer position on OpenAI's board, giving it access to the latter's confidential information. All this bodes well for Microsoft's future interests in the AI space.
NASDAQ: MSFT
Key Data Points
Microsoft is committed to the growth of Azure, which is the largest revenue driver for the company. Demand for Azure has rebounded, as customers have started bringing new workloads to the cloud. More than 18,000 organizations are also using the Azure OpenAI service (a cloud-based AI service provided atop Microsoft Azure) to build customized generative AI applications.
Microsoft also stands to benefit significantly from Microsoft 365 Copilot, an AI assistant integrated into Microsoft 365 applications to improve their productivity and creativity. Starting Nov. 1, 2023, Microsoft 365 Copilot has been available to enterprise customers at $30 per user per month. With 345 million paid members (paid seats) of Microsoft 365, there is a huge monetization scope in this AI offering.
Microsoft is also making its presence felt in the AI hardware space by introducing two AI and enterprise-workload optimized chips: Microsoft Azure Maia and Microsoft Azure Cobalt. This move will reduce the company's dependence on external chip players, further strengthening its growth prospects in the AI space.
Roblox
A leading online-entertainment platform, Roblox enables its users to develop and host games in virtual worlds and play them with other gamers across various devices. The platform doubles as a social-media application, allowing players to interact with each other. Roblox can also be considered a major contender for the metaverse opportunity. This is evident since all players in its games use avatars to play and interact with each other. Furthermore, players can also use the virtual currency Robux for in-game purchases or avatar upgrades.
NYSE: RBLX
Key Data Points
After a difficult 2021 and 2022, Roblox seems to be finally making a recovery with Q3 (ending Sep. 30, 2023) revenues and earnings surpassing consensus estimates. The company also posted a solid improvement in engagement trends, with average daily active users (DAUs) jumping 20% year over year to 70.2 million, while total hours of engagement also rose year over year by 20% to over 16 billion in Q3.
Roblox currently earns a major chunk of its revenues from selling Robux currency. However, the company has also partnered with Gucci brand owner Kering, Vans brand owner VF Corporation, Nike, and other such prominent brands to help bring traffic to their 3D virtual destinations to interact with brands, learn more about the products through videos, try stuff virtually, and finally purchase goods. Hence, Roblox's focus on providing users with a more interactive and immersive experience with the brands coupled with a large and engaged customer base can help establish advertising and sponsorships as a significant revenue source in the coming years.
Roblox also earns some revenue from selling its premium subscription service, Roblox Premium. Since only 20% of its users are paying subscribers, this area also has huge growth potential.
All these tailwinds make Roblox a compelling pick in 2024.
Zscaler
Cybersecurity player Zscaler came out with an impressive first quarter of fiscal 2024 (ending Oct. 31, 2023) performance, with revenues and earnings surpassing consensus estimates. This is an impressive feat considering that companies have been increasingly scrutinizing their cybersecurity budgets for large deals in the current difficult macroeconomic environment. The company also released stronger-than-anticipated revenue and margin guidance for Q2 and full-year fiscal 2024. While the weak fiscal 2024 billings outlook seems to have muted investor enthusiasm for the stock, there are still several things to like in this company.
NASDAQ: ZS
Key Data Points
With enterprises increasingly shifting complex AI-driven workloads to the public cloud, cybersecurity has become a mission-critical part of organizations' IT infrastructure. Furthermore, increased frequency of high-profile cyberattacks coupled with rising Securities and Exchange Commission (SEC) disclosure requirements have further spurred demand for the company's Zero Trust security solutions (a cybersecurity framework that requires all users and devices to be continuously verified and validated before they are given access to devices, data, and applications).
A critical aspect of Zscaler's success is its achievement in acquiring high-value clients who are entering into larger, multiyear, and multiproduct deals. Thanks to customers opting for Zscaler's broad platform over point products from multiple vendors, the company witnessed a 34% year-over-year jump in the number of customers spending over $1 million in annual recurring revenues (ARR) to 468 customers in Q1. Plus, the company's impressive dollar-based net-retention rate of 120% also underlines a robust upsell strategy wherein existing customers are not only staying with the company but also increasing their spending.
Hence, as the leader in the cloud-native zero-trust security market with improving operational and financial metrics, Zscaler still has plenty of growth potential in its $72 billion total addressable market.
