Investing in stocks is an effective way to help build and grow your wealth to better prepare yourself for retirement. You should pay special attention to growth stocks, as the capital gains you can enjoy from holding them over the long term can greatly accelerate your path toward financial freedom. Such stocks usually do not pay dividends, as the underlying business is reinvesting all of its profits and cash back into growth initiatives.
When it comes to choosing the right growth stocks to own, you should look at several important attributes to help you decide:
- The company needs to have a strong brand or a competitive edge that allows it to thrive.
- Its business should enjoy strong tailwinds that can help it grow for the foreseeable future.
- It should be managed by a competent team that can help it adapt to new trends and stay relevant in a fast-changing business world.
Let's look at three such businesses that have these attributes, making their stocks fast growers.
Image source: Getty Images.
1. Adobe
Adobe (ADBE 14.51%) is a software provider famous for its portable document format (PDF), which is used by millions worldwide. The company manages multiple software-as-a-service platforms, including Document Cloud which deals with PDF-related services, and Creative Cloud which allows users to conveniently generate images and text with search commands and prompts.
Adobe reported stellar earnings for its fiscal 2023 (ending Dec 1, 2023). Revenue rose 10.2% to $19.4 billion, with 94% of that coming from subscriptions. Operating income increased by 9.1% to $6.7 billion, while net income climbed 14.1% to $5.4 billion. The company also demonstrated an impressive track record of free cash flow generation, with the past three fiscal years seeing positive free cash flow of around $7 billion per year.
The momentum carried over into the first quarter of fiscal 2024 (ending March 1). Revenue for the quarter rose 11.3% year over year to a new record of $5.2 billion. Adobe booked a $1 billion impairment as part of the termination fee paid to Figma during the quarter, which caused its operating income to tumble by nearly 43% year over year to $907 million. Excluding this charge, Adobe's operating and net income would have improved by 20% and 30% year over year, respectively.
The company continues to release new software updates that showcase new advancements along with the use of artificial intelligence (AI) to improve workplace productivity. Last month, the software company released its new Photoshop Beta with a new Generative Fill function that makes it easier for users to generate beautiful AI-influenced images. Earlier this month, Adobe also incorporated its AI Assistant for enterprise customers into its Reader and enterprise software across desktop, mobile, and web. New capabilities enabled by AI can allow workers to be more productive and help them generate insights and write-ups for reports, blogs, and presentations.
2. Zscaler
Zscaler (ZS 1.75%) is a cybersecurity company with an integrated platform that provides cyber and data protection to its customers. Zscaler enjoys strong tailwinds from the digitalization trend powered by the recent pandemic, which pushed many organizations to embrace cloud computing, thereby creating a stronger demand for threat identification and data protection. The company reported a sparkling set of earnings for the first half of fiscal 2024 (ending Jan 31, 2024). Revenue surged by 37.5% year over year to $1 billion, while gross profit improved by 37% year over year to $793 million. On the cash flow front, the cybersecurity firm generated $325.5 million of free cash flow, slightly more than double the $158.4 million churned out in the previous year.
Zscaler is also acquiring larger-ticket customers -- customers with more than $1 million in annual recurring revenue jumped 31% year over year to 497 for the second quarter of fiscal 2024. Roughly four out of 10 customers were Fortune 500 companies, providing revenue certainty to the business and a pathway to higher annual recurring revenue should these companies decide to spend more.
The company also recently launched its Business Insights add-on to its business analytics portfolio to enable its clients to reduce cyber risks and improve their employee experience. Management is aiming to scale its platform to take on larger customers and increase its annual recurring revenue to $5 billion, or even $10 billion over time, by adding domain experts for specific sectors that can help align with what customers are looking for. Zscaler's current target market comprises 335 million serviceable users, but the company believes that this should increase to more than 600 million potential business-to-business users, giving the firm a $72 billion serviceable market that it can tap into for continued growth.
3. Shopify
Shopify (SHOP 4.59%) provides a cloud platform with a full suite of tools used by entrepreneurs and small business owners to start and run their retail and online businesses. The company saw a surge in demand for its services as more people started home businesses and side hustles during the pandemic. This hybrid work culture continued even as pandemic pressures eased, and provided a tailwind for Shopify's business to continue growing. Shopify reported healthy revenue growth for 2023, with a 26.1% increase to $7.1 billion. The business also generated a positive free cash flow of $905 million for the year, a turnaround from the negative free cash back in 2022.
Revenue has continued rising in the first quarter of 2024 as Shopify reported a 23.4% year-over-year increase to $1.9 billion. Free cash flow for the quarter stood at $232 million, more than doubling year over year from $86 million in the prior period. Gross merchandise volume and gross payment volume saw year-over-year increases of 23% and 31.6%, respectively, to $60.9 billion and $36.2 billion. The business also saw monthly recurring revenue jump 32% year over year to $151 million, aided by higher prices across all of its subscription plans.
Shopify also rolled out several product enhancements during the quarter, such as a web performance dashboard along with AI-enabled editing tools embedded within its platform. These enhancements, coupled with steady and growing demand for the company's suite of solutions, should see the business enjoy steady long-term growth in the years ahead.
