Growth stocks have been the darlings of the market for the past decade or so, but they have also been a thorn in many investors' sides. That's the high-risk, high-reward nature of growth stocks, though. The upside is virtually limitless, but the swings are not for the shortsighted.
Many growth stocks are known for prioritizing continued growth over maximizing profits, but some companies manage to do both pretty well. Profitability doesn't stop market volatility but can make it much easier to stomach.
Here are three growth stocks that have good bottom-line potential.
1. Alibaba Group
Alibaba Group Holding (BABA 0.59%) has been on a roller coaster for the past few years. China's zero-COVID policies, controversies surrounding co-founder Jack Ma, and other legal conflicts have weighed down the stock. It's now down almost 70% from its October 2020 peak and 22% from its 52-week high of around $151.
In its latest fiscal year (ended March 31), Alibaba made more than $126 billion in revenue, up 2% year over year. That's not exactly what you want from a growth stock, but given China's broader economic issues, it's a positive step. A brighter sign is its net income, which was up more than 360% year over year.
There's no doubt Alibaba's success is directly tied to the growth of the Chinese economy, which has been lackluster since reopening, but that could be a gift for investors. China's economic problems seem already priced into the stock, so any positive outlook from here should be a huge catalyst.
China seems to be taking steps to help, with recent moves like lowering interest rates to spark consumption and (hopefully) GDP growth. Despite what may be short-term issues, Alibaba's valuation gives it way more upside than downside. Its price-to-sales ratio is 1.8, almost one-fifth what it was just three years ago.
Data by YCharts.
Even slight growth in Chinese consumer spending should work wonders for Alibaba's bottom line.
2. Chipotle Mexican Grill
It's been a good decade for Chipotle Mexican Grill (CMG 2.41%) and its investors. Its more than 440% in gains over that time far outshine the S&P 500's (still impressive) 166% gains. Its recent success also makes it the second-most-valuable restaurant chain in the world by market cap, trailing only McDonald's.
Chipotle's $291 million in net income in the first quarter is up 84% year over year, and this trend should continue as the chain expands its reach and operating margins, which are now around 15.8%, a noteworthy difference from just five years ago. Excluding corporate costs, its restaurant-level operating margins are an impressive 25%.
Data by YCharts.
As Chipotle adds to its more than 3,100 locations, profitability and margins should improve because certain corporate overhead costs (like salaries and office leases) should remain relatively stable or, at the very least, increase much slower than revenue.
Chipotle has flourished through a period when a lot of consumer discretionary spending was slowed due to broader economic conditions like inflation, which is a testament to its pricing power and customer loyalty. That's a recipe for continued success.
3. Amazon
With a market cap of more than $1.3 trillion, it might be hard to picture Amazon (AMZN 3.43%) as a growth stock, but it is by most accounts. Like most big tech stocks, Amazon has had an impressive 2023, with the stock up over 48%. The hype surrounding artificial intelligence (AI) is largely to thank, but the company still has impressive financials to back the gains.
Amazon's $127.4 billion in revenue was up 9% year over year, but its $3.1 billion in net income was up more than 180% year over year. This large increase in profitability is largely due to the company's steps to lower operating costs and become more efficient.
What's more impressive (and simultaneously a potential slight cause for concern) is the fact that it managed to do this with revenue from e-commerce being essentially flat. Amazon's cloud service, AWS, has been doing the heavy lifting to pad its bottom line as far and away the industry leader in global cloud computing.
Amazon's three main industries -- e-commerce, cloud, and advertising -- are all projected to grow by double-digit percentages until 2030. Assuming revenue growth can mirror industry growth, it should put the company on a path to double its revenue by 2030. With cost-cutting measures in place, this jump in revenue should translate to profit growth.
The stock isn't necessarily cheap, given its 2023 rally, but it's a long-term choice that investors can feel comfortable holding.
