Growth stocks saw plenty of volatility in the past year as investors have shown renewed faith in the market, rewarding some businesses with great gains. But there are still plenty of great businesses out there whose stocks haven't seen enough love. With the emergence of a new bull market in 2024, investors may be looking for fresh opportunities for investing in promising stocks.
No stock is a guaranteed winner, and the history of a company doesn't always portend its future performance. Even great stocks go through turbulent periods, particularly those with general vulnerability to discretionary consumer spending and overall shifts in investor sentiment. Given time, quality companies with valuable use cases and a wide moat eventually rise and help build a solid, diversified portfolio.
Here are two intriguing businesses to consider in 2024 as potentially great buy-and-hold candidates.
1. Duolingo
Duolingo (DUOL 3.64%) is an education technology company known for its popular app where users can learn over 40 languages in short lessons that typically last 30 minutes. The company makes money in a few different ways, as it has both a free version of its software that is ad-supported and paid versions where it earns money from subscriptions.
The company currently offers two primary paid tiers: Duolingo Super, which offers a range of features and tools above the free version, and its newer version Duolingo Max, which includes various AI integrations from OpenAI's large language model GPT-4. These integrations include a feature called Roleplay, which allows the user to practice conversations in the language they are learning with AI-powered characters in the app.
The company is growing at a rapid clip and posted its first quarterly profit in the second quarter of 2023. Investors have responded positively to the stock recently, driving shares up by more than 90% over the past year.
In 2023's Q3, Duolingo generated $154 million in total bookings, up 49% year over year, and $121 million of that came from subscription bookings, a 54% jump from one year ago. Total revenue for the three-month period rose 43% year over year to $138 million, while net income totaled $3 million.
Duolingo ended the quarter with 5.8 million paid subscribers, 83 million monthly active users, and 24 million daily active users. These three figures were up 60%, 47%, and 63% on a year-over-year basis. Bear in mind, the global language-learning market is on track to hit a global valuation of $337 billion by the year 2032.
The flexibility of online language learning makes studying a new language anytime, anyplace an accessible reality for everyone from students to professionals to eager polyglots. With a significant addressable market and plenty of room for multiple players, Duolingo looks like an interesting company to watch and perhaps one to make even a modest investment in as 2024 gets underway.
2. Chewy
Chewy (CHWY 2.99%) stock is trading down by around 60% over the last year. There are a few reasons for this, including continued mixed attitudes around growth stocks among investors, fluctuating profitability, and concerns about the overall growth opportunity in a post-pandemic reality.
It's no secret that pet spending and pet ownership skyrocketed in the earlier days of the pandemic with millions of people being trapped at home for lengthy periods. However, the economic turbulence that followed affected spending in a myriad of areas and made the cost of owning a pet even higher than before. While pet spending is often an essential expense for households, cutbacks in spending are happening.
A study conducted by USA Today of 1,000 dog owners across the country last year found that 91% of respondents had dealt with financial worries due to their pet, and 55% of respondents had scaled back or delayed vet services. However, pet spending is still a priority for many households, as these furry friends are often viewed as extensions of the family unit. In that same study, 66% of respondents said that the cost of dog care had forced them to cut back on personal essentials like food and even healthcare services.
What does this all mean for a business like Chewy? In the short term, fluctuations in pet spending, given the ongoing volatility in the economy, are likely to occur. In the long run, though, pet spending is a durable trend from which this business can significantly benefit. It's worth noting that Chewy has a very diverse lineup of businesses, so it doesn't derive growth from just one or two sources of pet spending.
Chewy sells its own branded items on its flagship e-commerce platform, as well as many other third-party brands. It also runs its own pet telehealth service, sells pet health insurance plans, runs a pet pharmacy that includes a medication-compounding service, and recently released its own line of pet supplements.
In December 2023, the company announced that it would be launching its first veterinary practices called Chewy Vet Care where pets can receive urgent care and surgery as well as routine checkups. Chewy also expanded to its first international market, Canada, in September of last year.
The most recent quarter saw the company bring in net sales of $2.7 billion, an 8% year-over-year improvement, and free cash flow of $48 million. Moreover, 76% of Chewy's net sales are driven by its Autoship business, which is a subscription-based service that allows pet owners to receive recurring deliveries of their favorite products at the interval of their choosing. The success of this recurring revenue model is a key green flag for the business. While reporting a net loss of $36 million in the quarter, Chewy brought in generally accepted accounting principles (GAAP) net income of $41 million in the first half of 2023.
The stock still looks like a solid way to play the future growth of the pet industry, and it is one investors would be remiss to overlook, especially given its beaten-down stock price.
