When looking for companies to invest in, it’s only natural to try and find stocks that are good deals. But sometimes looking too hard for value stocks can lead investors to overlook high-growth companies.
To be sure, many fast-growing companies are more expensive than bargain stocks. But if investors buy the right companies and hold onto them for years, these more expensive stocks can still be worth the investment over the long term. To help investors find a few tech stocks that are growing fast — and that are still worth buying — we asked a few Motley Fool contributors for their top picks. They came back with Veeva Systems (NYSE:VEEV), Shopify (NYSE:SHOP), and Zoom Video Communications (NASDAQ:ZM). Here’s why.
Focused, sticky, and profitable, with digital transformation tailwinds
Brian Withers (Veeva): Veeva has come a long way since it was founded in 2007. Its focus on providing software tools for the life sciences industry has turned it into a highly profitable $1.3 billion annual revenue run-rate business with aspirations of growing to $3 billion by 2025. Given its track record of success, the market has awarded this software-as-a-service specialist a premium triple-digit price-to-earnings ratio and a lofty price-to-sales of 33. Let’s look at why long-term investors should consider paying up for this quality operator.
Veeva’s platform enables highly regulated life sciences companies to run just about any aspect of their business on its platform. It boasts many of the top pharma and medical device companies as its clients, and for good reason. Whether it’s commercial operations, managing clinical studies, controlling quality documents for manufacturing, or tracking product safety, Veeva’s end-to-end set of products is tailored to the needs of this demanding industry.
Customers usually start by implementing Veeva’s product in one area of the business. Once they realize the gains by digitizing their business on a common platform, customers expand their footprint over time. This “sticky” factor drives customers to spend more every year, evidenced by its annual net dollar retention rates above 120% for the last three fiscal years.
It’s not often that you see year-over-year revenue growth rates of 25% or more and meaningful profits, but Veeva’s accomplished that. Over the most recent trailing 12 months, net income is an impressive 26% of revenue. Even with these profits, it is still investing a solid 19% of revenue into research and development efforts to maintain its platform leadership position.
Digital transformation tailwinds
As the $2 trillion life sciences industry works to get the most from every dollar invested in innovation, digitizing its operations becomes a key enabler for unlocking employee productivity. The demands of this fast-paced industry aren’t getting any easier and Veeva’s long-term partnerships with life sciences companies give it the edge to continue to grow for years to come.
A solid business, a tremendous growth trajectory, and a sticky product make this growth stock worth its premium price.
Massive pandemic and secular tailwinds
Danny Vena (Shopify): It wasn’t that long ago that the majority of shopping happened in a brick-and-mortar store and e-commerce was the exception that was gaining ground. In the midst of the pandemic and the resulting widespread shutdowns, consumers turned to online shopping in greater numbers than ever before. Shopify is arguably one of the biggest beneficiaries of that trend.
Many consumers avoided physical stores entirely and others only occasionally ventured out in public to avoid catching the virus. For a number of merchants — particularly those that were late to the e-commerce revolution — offering their goods and services on the internet became a matter of survival. Shopify was there to answer the call.
The platform provides easy-to-use tools that make setting up and maintaining a website easy — even for a novice. Shopify offers over 100 ready-to-use website templates and hundreds of apps that make it simple to customize the look and feel of your online storefront. It doesn’t stop at web design, however. Shopify offers a host of other services, including payment processing and integration with all the major payment providers, inventory control, and lower-cost shipping options.
A tidal wave of merchants turned to Shopify for their e-commerce needs, a fact that was evident in its most recent financial report. In the second quarter, the company crushed expectations, sending its stock soaring to record heights. Revenue nearly doubled, climbing to $714 million, up 97% year over year, while its non-GAAP (adjusted) earnings per share jumped tenfold to $1.05.
Other metrics were equally impressive as new stores on the platform grew 71% quarter over quarter, while the volume of merchandise sold on its site jumped 119% year over year.
That’s not to say Shopify is cheap using traditional metrics. In fact, it’s quite the opposite. The company’s valuation comes in at a lofty 51 times sales, when a good price-to-sales ratio is generally between one and two. Its forward valuation is only slightly better at 42. However, it’s important to understand those numbers in terms of Shopify’s ongoing growth.
Analysts expect year-over-year revenue growth of 67% in the current quarter, 65% for the current year, and 31% next year. Given Shopify’s history of blowing past estimates with reckless abandon, these forecasts could turn out to be conservative.
Given the near triple-digit growth and the secular tailwinds as the world increasingly turns to shopping online, I would argue that Shopify’s valuation is actually quite reasonable.
Zoom out to see the bigger picture for this stock
Chris Neiger (Zoom): Many people in the U.S. right now can hardly make it through the day without hearing the word “Zoom.” Schools use Zoom’s video communication service for online learning, local governments use it for city council meetings, and everyday users log in to keep in touch with friends and family. In 2020, it’s become a necessary tool for getting our work done.
And investors have taken notice of this need. Since the beginning of this year, Zoom’s stock has skyrocketed 615%. The company’s share price rise has come as Zoom has put up some very impressive quarterly figures, including revenue growth of 355% in the second quarter and a 458% jump in customers with more than 10 employees.
Will Zoom be able to sustain such huge growth numbers for years to come? Of course not, but it doesn’t need to. The company is quickly carving out its niche in the video calling space and creating its own competitive advantage by being the go-to service for most of our video communication needs.
Even when the U.S. has widely distributed a coronavirus vaccine and has put the pandemic behind it, video calls won’t just fade away. This technology has already proved its mettle and it’s likely that the pandemic was just a catalyst for speeding up its adoption.
I expect some volatility from Zoom’s stock in the coming months as investors continue to take in more news about the U.S. recession and as some investors sell their shares to take some of their gains they’ve made recently. But even if there are some price swings in Zoom’s future, it’s likely that investors who buy and hold this stock for the long haul won’t be disappointed.