In the dynamic world of stock investing, where the thrill of momentum meets the stability of long-term strategies, there's always a sweet spot for savvy investors. In the spirit of The Fool's market-beating Rule Breakers service, I love to identify underappreciated growth stocks with the resilience of solid management and innovative business strategies.
On the hunt for top dogs and first-movers in burgeoning industries, I look for sustainable business advantages such as booming market momentum, patent fortresses, visionary leadership, or the missteps of competitors.
This approach often aligns with the principles of momentum trading, a strategy that capitalizes on directional trends in stock prices. Momentum traders aim to "buy high and sell even higher" -- a path lined with both rewards and risks. The volatility and timing of momentum trades can be challenging, requiring a nuanced understanding of market trends and investor behavior. It's also a highly rewarding strategy when you get it right and a couple of big winners can make up for several underperforming picks.
Now, let's move on to some specific stocks. Today, applying these principles led me to Shopify (SHOP 1.11%) and Atlassian (TEAM -9.56%). This thrilling duo of stocks isn't just on the rise; they're fundamentally geared for continued success. So let's check out why I see them as sizzling-hot opportunities in today's stock market.
Shopify: Build a world-class shopping platform and the rest will follow
E-commerce platform expert Shopify is on a roll. The stock has gained 53% in the last three months and a staggering 123% over the last year and its most important financial metrics look like this:
SHOP Revenue (TTM) data by YCharts
By making it easy to build and maintain an online shopping experience, Shopify reported double-digit revenue growth even in the economically stunted environment of 2022. The company generated $549 million of free cash flows in the last four quarters, up from a $186 million cash burn in fiscal year 2022. Its e-commerce platform is rising above the small-business focus that took it this far, signing enterprise-scale clients such as Unilever and Kraft Heinz in 2023.
And these are still early days in Shopify's growth story. The company has a modest 10% market share in the U.S. e-commerce trade and online shopping represents just 15% of all retail activity in North America -- and even less in regions like Asia-Pacific and Latin America.
Most of all, I see an excellent management style at work here. Here are the three pillars of Shopify's business culture:
- Build the best product in the world and the team and culture to support it
- Make money so we can do more of #1
- Never reverse #1 and #2
This philosophy carries echoes of many powerful ideas. Alphabet (GOOG 9.96%) (GOOGL 10.22%) swears by "10 things we know to be true," including "focus on the user and all else will follow" and "great just isn't good enough."
Quality comes first and the business results will naturally follow. "If you build it, they will come," may be a silly movie tag line but the line also holds true in the business world. That attitude turned Alphabet into one of the world's most successful companies with a $1.8 trillion market cap. Shopify sure could have picked worse role models.
So I love Shopify's high-level business doctrine, which shows through in the company's terrific financial results. This stock should continue to rise -- not constantly, but the long-term trend is clear -- for many years to come. And you can actually still call it "undervalued" if you insist; Shopify's stock price has soared recently but remains more than 50% below the all-time highs of November 2021.
Shopify is indeed a sizzling growth stock. I don't own it yet but I'm sorely tempted to start a position before it skyrockets back to yesteryear's record prices and beyond.
Atlassian: Another lighthearted innovator with serious business plans
Many of the things I said about Shopify also ring true for Australia-based collaboration software specialist Atlassian.
- The stock trades roughly 50% below the highs seen just before the global inflation crisis kicked off in 2021. At the same time, Atlassian's shares have gained 27% in one quarter and 67% over the last year.
- Atlassian's 5 core values are all about a fun and healthy work-life balance, not so much about money. And management slid some lighthearted fun into the guidelines themselves. As a great example of "be the change you seek," Atlassian's team members "don't #@!% the customer." Elsewhere, management talks about "building a 100+ year company." The wording may be different, but I see a Shopify-like and Alphabet-inspired spirit in these documents.
- And the business is going places. My daily work includes heavy doses of its Jira, Trello, and Confluence tools. The company serves more than 265,000 customers, driving a 29% year-over-year jump in third-quarter revenues while more than doubling its free cash flows.
Moreover, Atlassian likes to make its products do the talking, leaving most of its marketing in the hands of positive word-of-mouth reviews. And now I'm back to the good old Google philosophy again -- build a great collaboration platform and the financial results will follow. You don't even have to promote it if the darn thing is good enough.
Judging by Atlassian's stellar results, and plethora of industry awards, its tools are more than "good enough." And that's why the stock also looks tempting today, even after a 67% rebound in the last 52 weeks. Like Shopify, this company is going places and its stock is a sizzling-hot rocket with miles to go before it sleeps.
