What is a growth stock?
A growth stock refers to a company that is expected to see its financial performance and share price grow at a rate ahead of the market average.
With that in mind, growth stocks are often smaller companies, have elevated revenue and at times, earnings expectations from the market and tend to reinvest the majority of their profits directly back into the company. As a result of this, growth stocks also typically don’t pay out dividends.
Secondly, investors should also realise that because growth stocks are often in the early stages of their life cycle – or operating in new and ever-changing business areas – for many fast-growing companies their grand ambitions often fail to become reality. Because of this, growth stocks generally have a higher risk profile than other investments. Of course that also means that they also offer potentially higher rewards – should a company successfully execute on their ambitions.
Growth vs value stocks: what’s the difference?
Another way to think about ‘growth stocks’ is to look at how they compare to ‘value stocks’.
Indeed, if value stocks trade on low-multiples, inhabit out of favour industries and are seen as inherently boring – growth stocks represent the exact opposite. That is, they tend to trade at above market multiples, in cutting edge industries and they are the opposite of boring: both their business models and the prospect of investing in them seems exciting!
Yet the reality is growth and value stocks aren’t exactly opposites. Looking at some of Australia’s ‘Top 10’ growth stocks below we see that such contrasts – while helpful – can also be misleading. Not every growth stock is a flashy tech stock; and nor are they always part of the next ‘BIG’ trend.
It was Warren Buffett after all – an investor who many associated with a strict value approach to investing – who said:
‘In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.
Top 10 growth stocks on the ASX right now
Now that we have touched on what a growth stock is, we take a look at 10 ASX-listed growth stocks that investors may consider worth watching in 2021.
1 Year Return
Temple & Webster
*Share price data correct as of 4 January, 2021.
**Share price performance since listing October 22.
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Founded in 2006, Redbubble is a e-commerce company that specialises in helping artists sell their products on a global scale. The company is primarily focused on clothing, wall art, and stickers, though the emergence of the COVID-19 pandemic also saw the company pivot to the sale of face masks, often with an aesthetic twist.
The pandemic also dramatically accelerated the company’s growth. In the Q1 of FY21, RBL reported:
- Marketplace revenue of $147.5 million, up 116%
- Gross profit of $64.5 million, up 149%
- Operating cash flow of $27.1 million, up 165%
Temple & Webster (TPW)
Temple & Webster operates an Australian-focused e-commerce store that primarily sells homewares, furniture and other items. Like Redbubble, the pandemic has acted as a key tailwind for the company, as lockdown mandates forced people to spend more and more time inside their homes.
Highlighting this strength, in FY20 the company reported:
- Full-year revenue of $176.3 million, up 74%
- EBITDA of $8.5 million, up 466%
- Active customers of 480 thousand, up 77%
Another buy now pay later company touting strong growth, Zip focuses on slightly larger purchases than Afterpay, offers business-focused BNPL services and is an authorised credit provider. Like others in the space, Zip saw its operational performance dramatically improve in 2020, as customers turned to online shopping and e-commerce platforms.
Most recently, the company reported that it had 5.3 million customers, and recorded transaction volumes of $577.1 million, up 100% YoY, in November.
A divisive company in the fast-growing buy now pay later space, Afterpay personifies a growth stock: stratospheric top-line growth and an equally elevated valuation. Moreover, far from hindering the company, like many others on this list, the pandemic acted as a tailwind for the company, as underlying sales, revenues, users and repeat usage metrics all soared in 2020.
Most recently, the company announced it had surpassed $2 billion in underlying sales in November 2020 – a feat which speaks to Afterpay’s hyper-growth.
2020 was an important year for PointsBet: Not only did the sports betting company notch up and continues to notch up a strong operational performance, but the company also announced a multi-year media partnership with NBC Sports. At the time, analysts from RBC described this partnership as game changing, noting that it gives PBH ‘access to market-leading broadcast assets which span 184 million views and digital assets which span 60 million monthly active users.’
Beyond that, PointsBet has continued to performed strongly. In the Q1 of FY21, PBH reported:
- Turnover of $691.9 million, up 193%
- Total active clients of 164.5 thousand
- Net win of $38.1 million, up 222%
2020 proved to be a breakout year for the share price of cloud-focused accounting software company Xero, with the stock surging ~80% in that period. Despite a pandemic, Xero continued to notch up a strong operational performance in CY20, reporting solid double digit revenue growth as part of its most recent half year report. Looking at the highlights from the company’s most recent H1, Xero reported:
- Revenue of NZ$409.8 million, up 21%
- Total subscribers of 2.45 million, up 19%
- Earnings (EBITDA) of $120.8 million, up 86%
- Net profit (NPAT) of $34.5 million
Elsewhere, in December 2020 Xero was added to the ASX 50, a sign of the company’s growing significance.
Like Redbubble and Temple & Webster, e-commerce retailer Kogan has deeply benefitted from the accelerated shift to online, notching up a record operational performance in 2020. The company, which mainly sells electronics, in 2020 witnessed robust growth across the board, reporting:
- Gross sales of $768.9 million, up 39.3%
- Adjusted earnings (EBITDA) of $49.7 million, up 57.6%
- 21 cents per share in total dividends, up 46.9%
More recently, the company announced it had acquired the New Zealand focused retailer Mighty Ape, in a deal valued at $122 million.
Primarily involved in the operation of data centres across Australia, NEXTDC has performed solidly over the last year, with the stock up more than 600% in that period. Despite the pandemic, NXT reported solid double-digit growth across all of its key operational metrics in FY20, revealing:
- Total revenues of $205.2 million, up 14%
- Underlying earnings (EBITDA) of $104.6 million, up 23%
- Total customers of 1,364, up 15%
Optimism around NXT remains elevated, with the company recently reiterating an FY21 outlook that highlighted revenue growth of between 21-25% and underlying (EBITDA) growth of between 20-24%.
As an increasingly popular payments platform with a religious focus, the Pushpay share price has struggled in 2020, falling over 50% in that period. This comes even after the company reported strong growth as part of its recent interim results, revealing total revenue grew 51% while total profits (NPAT) rose 107%.
Looking ahead, Pushpay management said:
Pushpay expects further strong revenue growth as we continue to execute on our strategy to gain further market share in the medium-term and believes this is the best way to maximise shareholder value.
Like many retail companies and those in adjacent spaces, the recently listed MyDeal – an online market place company with a focus on homewares and furniture – saw its operational performance improve dramatically across November, a period which encompasses Black Friday and Cyber Monday.
Overall, across November, the company reported:
- Monthly gross sales of $030 million, taking gross sales for the first five months of FY21 to $105 million
- Active customers hit 778 thousand, up 236%
- 52.9% of all transactions in this period were from returning customers, up 49.7%
How to find and pick growth stocks
Stock picking is often viewed as a combination of art and science. With that in mind, we look at the some of the general criteria an investor may look out for when picking growth stocks.
Examine current and future trends: often the most growth comes from trends that have yet to fully take off. For example, while the buy now pay later trend was in its infancy just a couple of years ago – it has exploded in popularity in recent times – and sent the share prices of companies like Afterpay, Zip and Splitit soaring.
Examine revenue growth from the last 12 months (LTM) or even a quarter-over-quarter basis. For a growth stock, you generally want a double digit (or higher) growth figure, at minimum.
Screen for small and mid-cap growth opportunities. While larger companies do have the ability to grow revenue and earnings quickly; it is, in most cases, more difficult to double $100 billion in revenue than it is to double $100 million, for example.
Check to see what a company is currently doing with its capital. Is it reinvesting profits to grow the company with research and development or spending big on marketing to improve brand awareness? If not, the company may struggle to grow at an above-market rate.
How to trade and invest in growth stocks
Investors can buy, sell and trade any of the ‘Top 10’ growth stocks we’ve mentioned today by using IG’s market-leading trading platform.
How to invest in growth stocks
The primary reason and benefit of investing in growth stocks – over say dividend stocks – likely comes down to the potential for growth stocks to out-perform the broader market – in the short or even long term. The Afterpay (ASX: APT) share price, for example, has outperformed the broader ASX 200 benchmark by a significant margin – from January 2020 to January 2021 – rising a staggering 289%, compared to the ASX’s decline of 2.17%.
You can buy any of the ‘Top 10’ growth stocks we have discussed today through IG’s share trading platform by following the four simple steps:
Log into the IG account and go to the ‘My IG dashboard’
Fund your newly created share trading account. Open the classic platform on the share trading account, go to the finder panel on the platform, type in and select which growth stock you would like to buy
Click on the deal ticket: where the ‘on exchange’ option will appear. On exchange means interacting directly with the relevant exchange.
Of course, while growth stocks like Afterpay may have the ability to generate superior returns, such outperformance often comes with elevated levels of volatility. Illustrative of this, the Afterpay share price bottomed out at $8 per share (a decline of close to 80%) during March 2020s market meltdown. At the time of writing APT traded at $120 per share.
Because of reasons such as this, growth stocks may not be the best option for conservative investors, though they may prove to be a great option for risk-tolerant investors; or traders looking to benefit from share price volatility.
How to trade growth stocks
For those looking to capitalise on the short-term price action of growth stocks and other assets – traders can utilise IG’s CFD trading platform.
Ultimately, trading CFDs gives an individual the chance to benefit from higher or lower price movements of an underlying asset. Additionally, as the Afterpay example we just examined shows: growth stocks can provide greater opportunities to benefit from higher levels volatility, open up more varied trading opportunities for experienced investors.
Of course, this volatility represents a somewhat double-edged sword. While a growth stock may favourably move for a trader in short-order – they can also move against a trader in an equally short time-frame. Such issues may be further compounded when trading with CFDs given that they are leveraged products. Though your potential gains may be maximised, so to may your losses.
If you want to trade any of the ‘Top 10’ growth stocks we have discussed today, you can utilise IG’s CFD trading platform to can speculate on the share price movements of the underlying asset – both up and down. In this case, you would ‘buy’ – take a long position – if you think a growth stock’s share price will rise; or you would ‘sell’ – take a short position – if you think the share price will decline. For example, if you anticipate that any of the growth stocks we have discussed today will decline in value, you could take the following steps to ‘sell’ or SHORT them:
Create an IG trading account or log in to your existing account
Look for the growth stock you believe will decline in value in the search bar
Choose your position size
Click on ‘sell’ in the deal ticket
Confirm the trade
What to bear in mind before trading growth stocks:
Importantly, because growth stocks tend to represent companies at the early stages of their life cycles, investing in them is often considered riskier, or even speculative in nature.
For one, their business models may prove unsustainable or the emergence of other competitors may eat into their growth plans – disrupting their ability to sustainably grow their business in the long term.
Secondly, growth stocks often become valued not on the basis on their current operations; but on the idea of their future growth/ market dominance. If a company can keep up with the market’s growth expectations, there is potential that its share price will continue to rise. For example, while Afterpay’s share price continued to break new highs in 2020, it also continued to trade on a high price to sales ratio throughout that period. That metric hasnt come down either: Afterpay last traded at 60x sales, well ahead of the market and historical averages.
Investors of late however seem to pay little attention to such metrics.
Growth stocks summed up
Growth stocks can be a great avenue for traders and investors to take advantage of rapid capital appreciation and/or price volatility in young and exciting new publicly listed companies. Overall, when thinking about investing in growth stocks investors should remember that:
- They tend to be smaller companies and may be prone to volatility
- They often don’t pay dividends
- The usually reinvest profits directly back into the company or into marketing initiatives
- They potentially offers investors above market average returns – at a higher risk
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