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Growth stocks are companies that operate in industries with plenty of room for expansion. Some of these stocks have the potential to generate higher returns over the long term, potentially outperforming the broader market. Investing in growth stocks from various sectors and industries provides diversification, which can reduce risk in the portfolio.
Since the artificial intelligence (AI) rush began, tech stocks have been in high demand. Here I have chosen to discuss two such stocks: Meta Platforms (META), a social media company, and Hubspot (HUBS), a cloud-based software company.
Among the "Magnificent Seven" group, Meta (formerly known as Facebook) stood out last year with its innovative AI-driven growth, with its stock soaring 194%. The company reported another strong quarter last week, reaffirming its position as one of the best tech stocks to buy right now.
Meanwhile, Hubspot, while slow, has been steadily working to increase its revenue and earnings. Wall Street rates both Hubspot and Meta stock worthy of a “strong buy” recommendation. Let’s find out why.
Meta Platforms' Impressive Growth Trajectory
META stock's "strong buy" rating comes as no surprise. The company's social media platforms, including Facebook, Instagram, and WhatsApp, have a massive consumer following, which has been boosting revenue and profits. In a recent earnings call, CEO Mark Zuckerberg claimed that more than 3.1 billion people use at least one of Meta’s platforms.
Meta’s stock is up 33% year-to-date, compared to the S&P 500 Index’s ($SPX) gain of just over 5%.
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Amid the integration of AI into Meta's ecosystem, Wall Street is optimistic about its future prospects. While its Family of Apps (FoA) segment, which includes all of the social media platforms, generates the majority of its revenue, the metaverse-focused Reality Labs (RL) segment is showing signs of recovery after long periods of slowing growth.
In the fourth quarter, the FoA segment brought in $39.0 billion in revenue and operating income of $21.0 billion. The RL segment, which comprises Meta’s augmented and virtual reality (AR and VR) products, reported a surprising and massive 47.1% year-over-year increase in revenue to $1.07 billion.
The majority of the growth in RL can be attributed to increased Quest 3 sales. During its Connect conference in 2023, Meta launched its mixed reality headset, Quest 3, powered by Meta AI, alongside a slew of other AI products. Meta also introduced the next-generation Ray-Ban Meta smart glasses, powered by Meta AI. Management stated that both products experienced strong growth in the quarter, and that they expect this to continue.
Meta expects AI will be a significant investment area for the company in 2024, resulting in a capital expenditure of around $30 billion to $37 billion for the full year. Financially, Meta appears to be capable of increasing its stake in the AI game. The company ended the quarter with $65.4 billion in cash, cash equivalents, marketable securities, and $11.5 billion in free cash flow (FCF). It also had $18.4 billion in long-term debt, which the company should be able to repay.
The company's large FCF balance also enabled Meta to begin paying dividends, as it declared its first-ever quarterly dividend payment of $0.50 per share. Meta intends to continue dividend payments every quarter.
Analysts predict that Meta's revenue and earnings will rise by 17.2% and 34.4%, respectively, for the full year 2024. Meta currently appears to be a worthwhile long-term investment, trading at 20x forward earnings versus its five-year average price-to-earnings ratio of 22.7x.
Overall, Wall Street rates Meta Platforms stock as a “strong buy.” Out of the 44 analysts covering the stock, 39 rate it a “strong buy,” one rates it a “moderate buy,” three rate it a “hold,” and one recommends a “strong sell.”
The average target price for META is $497.48, which is 5.8% above current levels. Furthermore, its high target price of $575 indicates a potential upside of 22% over the next 12 months.
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Hubspot Heads Towards Profitability
HubSpot is a marketing and sales software platform operating through the cloud. The software-as-a-service (SaaS) platform includes tools for social media management, content creation, email marketing, and search engine optimization (SEO) that help businesses improve their online presence and attract customers.
Founded in 2006, Hubspot is a relatively small player in the customer relationship management software market. However, its slowly improving financials boosted its stock price by 100.7% last year, compared to larger rival Salesforce's (CRM) 98.5% gain.
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The company places a high value on customer satisfaction, which may be why the number of customers increased by 22% to 194,098 in the third quarter. Total revenue increased 26% to $557.6 million in the quarter, driven by double-digit growth in subscription and professional services revenue. Adjusted net income for the quarter came in at $83.4 million, or $1.59 per diluted share, up from $0.69 in the prior-year quarter. So far in 2024, HUBS stock has surged 12.2%.
Recently, Hubspot completed the acquisition of Clearbit, a business-to-business (B2B) data provider, to provide customers with more real-time, unified, and high-quality data. The company, however, did not disclose any financial details of the deal.
Hubspot's revenue increased at a compound annual growth rate of 27.5% between 2018 and 2022, but it remained unprofitable. However, management and analysts believe that 2023 will be a profitable year.
The company also has a robust balance sheet, ending the most recent quarter with around $1.6 billion in cash, cash equivalents, and short and long-term investments, which should allow it to expand its platforms using AI.
Looking ahead, Hubspot will report its fourth-quarter and full-year 2023 earnings on Feb. 14. Management expects Q4 revenue to arrive between $556 million and $558 million, representing an approximate 18% increase year-over-year. Analysts expect the company to report revenue of $558.75 million, in line with management's expectations. Management predicts adjusted EPS could range between $1.53 and $1.55, which is consistent with consensus estimates.
For the full year, management projects revenue between $2.144 billion to $2.146 billion, with EPS between $5.66 and $5.68 - both in line with analysts’ predictions.
Wall Street has assigned a “strong buy” rating to HUBS. Out of 26 analysts covering the stock, 21 rate it a “strong buy,” three recommend a “moderate buy,” and two rate it a "hold.” HUBS stock has already surpassed its mean target price of $594.79, but its high target price of $697 implies a potential upside of about 7% to current levels.
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Looking ahead, analysts estimate that revenue and earnings at HUBS will rise by 17.8% and 17.1%, respectively, in 2024. HUBS stock trades at 94 times forward 2024 earnings and 12 times forward sales. In comparison, peer Salesforce is trading at 35 times forward earnings.
Clearly, Hubspot's valuation appears steep, placing it in the high-risk, high-reward investment category. Until it maintains its high earnings growth trajectory, I would start with a small position in this cloud software stock.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.