Growth stocks are appealing to investors because they offer the chance for market-beating returns. This growth opportunity isn't without its downsides, but for patient investors, it can pay off in the long run with higher gains.
If you have $5,000 available to invest (meaning you have an emergency fund and high-interest debt is taken care of), splitting it between these two growth stocks can be a good option. Both have been volatile and face near-term threats, but their long-term upside far outweighs their downside.
1. Snowflake
Snowflake (SNOW 3.69%) is a data warehousing company that provides cloud-based data analytics and storage. When Snowflake went public in September 2020, it was one of the hottest growth stocks on the market. Its initial public offering (IPO) price was set at $120, and less than three months later, the stock was trading over $385. Even after a good 2023, it now sits well below its peak.
In the third quarter of its 2024 fiscal year (ended Oct. 31, 2023), Snowflake made $734.2 million in revenue, up 32% year over year and its highest quarter ever. It might not be the triple-digit-percentage growth Snowflake was experiencing a few years ago, but it's encouraging when you unpack where this revenue is coming from.
SNOW Revenue (Quarterly YoY Growth) data by YCharts
At the end of the quarter, Snowflake had 436 customers who spent at least $1 million with the company in the trailing 12 months. That's 52% more than the 287 they had in the same time frame last year and far outpaces the company's overall customer growth of 24% year over year.
A fast-growing enterprise customer base should benefit Snowflake's financials. Not only do enterprise customers provide a more stable revenue source, but they also tend to stick around longer. The company credited its enterprise customer success as one of the drivers of its improving margins. Its product gross margin was 78.3% in the third quarter, up from 74.6% one year prior.
Snowflake isn't yet profitable, but it's well on its way if it hits its revenue goal of $10 billion by the 2029 fiscal year. Snowflake's growth story is still in its early days, especially with the growth of big data and AI advancements. The company faces challenges from other tech giants but has a niche role in the growing market.
2. DraftKings
If you've watched sports in the past couple of years, you've probably noticed a dramatic increase in sports betting advertisements. Even professional leagues are partnering with sports betting companies, something that would've seemed unfathomable to a lot of people not too long ago.
One of the top players in the space is mobile sports betting company DraftKings (DKNG 4.96%), the leader in online gambling in the U.S.
DraftKings has been around since 2012, but recent developments in legal sports betting in the country have boosted DraftKings' market opportunity. The U.S. Supreme Court granted states the power to choose whether they wanted to legalize and regulate sports betting in their respective states in May 2018, and the momentum has been picking up since.
The equation is simple for DraftKings: The more places sports betting is legal, the more potential customers. To start 2024, 38 states and Washington, D.C., had legal sports betting up and running. DraftKings' sportsbook only operates in 26 of those states (North Carolina is coming soon), leaving plenty of growth opportunities in states where sports betting is currently legal and states where it may become legal.
Like many younger growth stocks, DraftKings is unprofitable, but profitability could be here sooner than anticipated. DraftKings initially anticipated an earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $190 million to $220 million for its fiscal year 2023, but it has since lowered it to a range of $95 million to $115 million. If the company hits its fiscal year 2024 revenue goals, it could expect EBITDA between $350 million and $450 million -- its first sign of profitability.
DKNG Revenue (Quarterly) data by YCharts
There's no way to tell whether states will begin legalizing sports betting, but I'm sure the revenue numbers from participating states will become increasingly convincing. Since June 2018, states have collected more than $4.3 billion in sports betting taxes.
As more states jump on board, DraftKings' brand power and established market presence should give it a competitive advantage in a field that's getting more crowded by the year.
