There’s no question that growth stocks got the best of value stocks in 2020. It wasn’t even close.
The S&P 500 Growth Index finished 2020 with a 33.5% total return (price plus dividends), with the best growth stocks doing several times better than that. Compare that to a mere 1.4% return for the S&P 500 Value Index, which was actually negative on a pure price basis.
Many experts are betting on a better year for value stocks in 2021. That includes JPMorgan’s global head of macro quantitative and derivative strategy, Marko Kolanovic. He believes the vaccine will increase economic growth in the second half of 2021, leading to value and cyclical stocks outperforming with lower-than-usual volatility.
That said, growth stocks, such as those in the tech sector, still will have to perform in the year ahead if the S&P 500 is to reach the bank’s forecast of 4,400.
“We have this quite optimistic S&P price target that cannot be achieved unless tech also goes up,” Kolanovic told CNBC. “We think there is going to be some very broad index inflows into equities as investors reallocate from bonds to equity. So that’s going to also keep that growth and momentum segment afloat.”
Will growth stocks have a tough time matching their performance from 2020? Absolutely. That includes the potential to come out of the gate sluggishly to start 2021. But investors seeking long-term growth potential would do well to monitor big dips for the chance to buy Wall Street’s premiere growth names.
To help you build your watch list, here are 11 of the best growth stocks to buy in 2021.
Data is as of Jan. 4. Analyst opinions provided by S&P Global Market Intelligence. Companies are listed by strength of analysts’ average rating, from lowest to highest.
- Market value: $21.4 billion
- Analysts’ opinion: 1 Strong Buy, 2 Buy, 12 Hold, 0 Sell, 0 Strong Sell
MarketAxess (MKTX, $562.78) might be the least-known name on this list. For those unfamiliar, MarketAxess operates a leading electronic institutional marketplace to trade bonds. By focusing on fixed income, it can provide institutional investors with the finest selection of new and core U.S. credit products.
One of the products MarketAxess uses to help its institutional investor clients is its Auto-Execution tool, otherwise known as Auto-X. The product was launched in early 2018; chief operating officer Chris Concannon stated in the company’s Q3 2020 conference call that automated trading volumes surpassed $30 billion, up from $23 billion a year earlier. Auto-X now accounts for 14% of its total trade count.
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When validating bond prices manually, it could take a bond trader 30-60 seconds per bond. With Auto-X, that’s been reduced to zero, saving institutional investors weeks of human resources each year.
Businesses that make or save money and time usually do well. MarketAxess is no exception.
In the past five years, MKTX has grown revenues from $302 million in 2015 to $511 million in 2019, a 69% growth rate. It has more than doubled net income in that time, to $205 million in 2019. Through the end of September, the top and bottom lines are up 36% and 46%, respectively.
MarketAxess was the second best-performing S&P 500 stock of the past decade with a total return of 2,770% through the end of 2019. Only Netflix (NFLX) did better.
MKTX might not deliver this kind of performance through 2029, but it still should be one of the best growth stocks of the next few years.
- Market value: $132.6 billion
- Analysts’ opinion: 10 Strong Buy, 4 Buy, 17 Hold, 1 Sell, 2 Strong Sell
If you invested $10,000 in Shopify (SHOP, $1,092.40) when it went public in May 2015 at $17 per share, you would have had almost $670,000 by the end of 2020. The company’s e-commerce platform has been front and center during the pandemic as companies of all sizes have rushed to get their products and services online.
Naturally, Shopify’s business has gone through the roof as a result.
The company’s third-quarter results were impressive by every metric. Total revenues grew by 96% to $767 million, with its Subscriptions Solutions sales (monthly fees paid to use its platform) up 48% to $245 million. Its Merchant Solutions revenue, which is the sales it shares for transactions done through its platform, rose by 132% to $522 million.
For the first nine months of 2020, Shopify’s Subscription Solutions revenue grew by 37% to $629 million, while Merchant Solutions sales rose by a whopping 115% on the back of a 94% jump in gross merchandise volume (GMV) to $78.4 billion.
One area to keep an eye on in 2021 is Shopify Capital, its lending business. It provides cash advances and short-term loans to users of its platform. Shopify advances a certain amount of money, and the merchant then repays a set percentage of their daily sales until repaid in full.
In the third quarter, Shopify merchants from the U.S., U.K., and Canada got $252.1 million in funding – 79% higher than in the same period a year earlier. Since its launch in April 2016, it has advanced $1.4 billion to Shopify merchants. Approximately $248 million was outstanding at the end of September.
While Shopify expects many of its advances in the near term will be for COVID-19 assistance rather than growth, it ultimately will reap the rewards of operating this kind of business in an expansionary environment.
- Market value: $99.7 billion
- Analysts’ opinion: 17 Strong Buy, 6 Buy, 16 Hold, 3 Sell, 1 Strong Sell
Square (SQ, $221.16) rocketed 248% higher in 2020. A big reason for that was Cash App.
Cash App is the company’s software for sending and receiving money, but it has grown to be so much more, including banking, investing and even holding digital currencies – and it likely will expand to other products and services in the coming years.
Evercore ISI analyst Rayna Kumar recently upgraded Square’s stock from In Line to Outperform on Cash App’s potential. She also increased her 12-month price target by 86%, to $300 per share.
Cash App is expected to grow its adjusted revenue by 36% annually over the next three years and beat the consensus earnings estimates in each of those years.
“Over time, Cash App could become a one-stop, disruptive, digital payments bank,” Kumar wrote in early December. “With P2P, digital wallet, debit card, stock trading, and Bitcoin purchasing capabilities already in place, and, with its banking license, consumer and SMB lending potential, we believe Cash App’s network will continue to grow aggressively with expanded paths to monetization over time.”
Cash App has become the little engine that could. In Q3 2020, Cash App generated $2.07 billion in revenue ($485 million excluding Bitcoin) and $385 million in gross profits for growth of 574% and 212%, respectively, over a year ago. Excluding Bitcoin revenues, Cash App’s gross profit margin in the third quarter was 81%.
In the third quarter, Cash App accounted for 35% of Square’s $1.4 billion in revenue, excluding Bitcoin. Investors should expect this percentage to increase in 2021.
Interestingly, Cash App only launched investing in the app less than a year ago, and yet, 2.5 million customers have already bought stocks with it.
If you build it, they will come.
- Market value: $231.0 billion
- Analysts’ opinion: 18 Strong Buy, 9 Buy, 10 Hold, 2 Sell, 3 Strong Sell
Netflix (NFLX, $522.86) had another spectacular year in the markets, ripping off a 67% run in 2020, well more than three times the total return of the S&P 500.
The pandemic was good for video streaming services broadly. Though it should be pointed out that Netflix only added 2.2 million new paid subscribers in Q3 2020 – its lowest number since 2016. But don’t lose sight of the fact that Netflix expects to add 6 million new paid subscribers in 2020’s final quarter, bringing its total over 200 million for the first time in its history.
From a free cash flow perspective, the third quarter was a significant success. In Q3 2019, it used $551 million in free cash flow; this year, it was positive to the tune of $1.15 billion. In the trailing 12 months ended Sept. 30, it had free cash flow of $650 million, putting it in a position to finish the year with positive free cash flow for the first time in years.
Based on its forecast for operating income ($885 million) and total subscribers (201.15 million) in the fourth quarter, Netflix will finish fiscal 2020 with $22.45 in operating income per subscriber, up from $15.58 in operating income per in 2019.
Despite increased competition in 2020 from Disney (DIS), Apple (AAPL) and many others, Netflix remains the gold standard thanks to shows such as The Queen’s Gambit, which has become its most popular limited scripted series with 62 million households watching the show in the first 28 days on the streaming service.
CEO Reed Hastings continues to have plenty of ideas to keep Netflix among the best growth stocks of 2021 and beyond.
- Market value: $41.5 billion
- Analysts’ opinion: 10 Strong Buy, 5 Buy, 6 Hold, 1 Sell, 1 Strong Sell
Veeva Systems (VEEV, $274.26) provides cloud-based software solutions specifically for the life sciences and other healthcare-related industries. It’s working with some of the companies currently developing vaccines for COVID-19, including Moderna (MRNA) and AstraZeneca (AZN).
In December, Veeva reported third-quarter revenues of $378 million that were up 34% year-over-year and $16 million higher than analyst estimates. Veeva’s bottom line came to 78 cents per share, which was a dime better than the consensus view.
For Q4 2020, VEEV expects revenues of at least $378 million and earnings of at least 67 cents per share. Both forecasts came in ahead of the consensus.
“Veeva reported a beat-and-raise F3Q with strength across all areas of the business,” says D.A. Davidson analyst Rishi Jaluria. “Guidance for F4Q and FY22 came in above consensus and looks conservative, especially as initial FY22 revenue guidance calls for a deceleration to 19% Y/Y growth.”
“FY22 non-GAAP operating margin guidance reflects Veeva investing more in newer growth drivers, such as Data Cloud and MyVeeva, which we view as the right move,” says Jaluria, who maintained a Buy rating and $325 price target.
On Sept. 16, Veeva announced that it had formed a committee on its board to explore becoming a Public Benefit Corporation – “a for-profit corporation that has also adopted a public benefit purpose.”
“Unlike a traditional corporation whose only legal duty is to maximize shareholder value, PBCs consider their public benefit purpose and the interests of those materially affected by the corporation’s conduct – including customers, employees, and the community – in addition to shareholders’ interests,” Veeva said in a press release.
Although more than 2,000 companies have converted to PBCs, Veeva would become the first from the Russell 1000.
- Market value: $83.5 billion
- Analysts’ opinion: 10 Strong Buy, 6 Buy, 7 Hold, 1 Sell, 0 Strong Sell
MercadoLibre (MELI, $1,675.22), which has been in business since 1999, became the most valuable company in Latin America in August with a market capitalization of $60.6 billion. Since then, it has swelled to more than $80 billion in market value as it continues to benefit from Latin America’s e-commerce growth.
CEO and co-founder Marcos Galperin believes the COVID-19 pandemic has accelerated its growth curve exponential.
“This pandemic has moved us forward maybe three to five years,” he told Financial Times in November.
Galperin believes MercadoLibre has at least another decade of growth in it. Over the past 10 years, MELI’s sales have exploded by 1,231%, from $172.8 million in 2019 to $2.3 billion in 2019. A growing part of its business is Mercado Pago, the company’s online payment solution.
In 2009, its payments services accounted for 26% of its overall revenues. In 2019, that figure has expanded to nearly half of its overall business.
Today, MercadoLibre is equal parts e-commerce titan and fintech operation.
When you consider that e-commerce sales in Latin America account for just 10% of total retail sales – compared to more than 30% in the U.S. and elsewhere – MercadoLibre has got quite the one-two growth punch on its hands.
As for MercadoPago and Latin American fintech, it has barely scratched the surface. There is so much fertile ground in insurance, asset management and lending.
MELI’s third-quarter sales of $1.1 billion were 13% better than analyst expectations, while earnings of 28 cents per share were 18% better. More importantly, operating profits of $153 million for the first nine months of fiscal 2020 were 281% higher year-over-year.
MercadoLibre could suffer some bumps and bruises early on in 2021 after nearly tripling in 2020, but this is one of the best growth stocks to buy on any sizable dips.
- Market value: $71.0 billion
- Analysts’ opinion: 8 Strong Buy, 5 Buy, 4 Hold, 1 Sell, 0 Strong Sell
As investments went in 2020, real estate wasn’t one of the big winners. But Prologis (PLD, $96.04), the industrial real estate investment trust (REIT) focused on e-commerce and logistics, did manage to eke out a total return of nearly 15% in 2020. That’s not bad, especially considering the pain among some of its peers; mall REIT Simon Property Group (SPG) lost 39%, and that’s including dividends.
Prologis currently wholly owns or is a co-investor with others in 976 million square feet of industrial real estate in 19 countries. It leases its warehouses and industrial spaces to more than 5,500 major companies in business-to-business and retail/online fulfillment. Its assets under management exceed $145 billion, generating more than $3 billion in net operating income.
Over the past five years, Prologis has grown its core funds from operations by 12% compounded annually. That’s significantly higher than the REIT average of 5% over the same period.
Prologis expects its “Core FFO” (FFO, or funds from operations, are a key profitability metric for REITs) to come to at least $3.76 per share, up from its original guidance in January of $3.67 per share. It also expects to finish the year with $1.1 billion in free cash flow after taking care of dividends.
Prologis produced a report in late October that suggests the supply of new industrial space will slow in early 2021, leading to faster rental growth in the coming year.
“At year-end, we expect vacancy of 5.0% and full-year 2020 rent growth of 2.5%, which reflects a much faster return to growth than anticipated; this growth is driven by strong demand for space,” the company says.
While REITs aren’t typically lumped in with growth stocks, Prologis is a worthy exception.
- Market value: $11.2 billion
- Analysts’ opinion: 8 Strong Buy, 5 Buy, 3 Hold, 1 Sell, 0 Strong Sell
Chegg (CHGG, $87.33) helps students of all ages perform their best through its connected direct-to-student learning platform. It provides students of all ages with study content, writing tools, math problem solving and 24/7 online tutoring. It got its start renting and selling textbooks to students.
The company had 3.7 million Chegg Services subscribers as of the end of September out of a potential market of 102 million students in the U.S., Canada, Australia and the U.K.
2020 was a huge success for the company’s business model. It finished the third quarter with 69% more subscribers year-over-year for its Chegg Services operating segment, which accounted for 77% of its quarterly revenue of $118.9 million.
For the full year, Chegg expects revenues of $626 million, with 81% of that coming from Chegg Services. It also expects adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of at least $201 million. Looking ahead to 2021, Chegg’s outlook is for sales to grow 5% to $655 million, and adjusted EBITDA to rocket 29% higher to $260 million.
Chegg Services continues to be the company’s big driver. That arm’s revenues have soared by 40% annually over the past five years. Over the same period, the number of subscribers has jumped from 1.0 million to 3.7 million – a compound annual growth rate of 32%.
Investors should expect Chegg’s business to continue to grow post-pandemic as its brand continues to become better known by students in the U.S. and elsewhere.
- Market value: $53.7 billion
- Analysts’ opinion: 15 Strong Buy, 6 Buy, 3 Hold, 1 Sell, 0 Strong Sell
Twilio (TWLO, $334.59), the cloud-based provider of application programming interfaces (APIs), allows companies to better communicate with their customers. Box (BOX), for instance, uses the Twilio communication platform to verify its users’ identities through text messages. Airbnb (ABNB) guests use it to reach their hosts. The list goes on.
Whether it be video, audio, text, email or other means of engaging customers, Twilio’s platform can help. That came in handy while Americans were forced to work from home during the pandemic.
But it’s hardly a passing fancy. TWLO has been one of the market’s best growth stocks for several years running.
Twilio’s sales have grown by 44% in 2017, 63% in 2018 and 75% in 2019. During the first nine months of 2020, revenues of $1.21 billion were 51% higher than a year earlier. TWLO expects fourth-quarter sales to grow by 36% to 37%, to at least $450 million. If it reaches its outlook, the firm will finish fiscal 2020 with $1.66 billion in sales, or a 48% jump from 2019. That has resulted in a roughly 1,070% gain since the start of 2017.
Two key metrics to watch: active customer accounts, which jumped 21% in the third quarter to more than 208,000, and dollar-based net expansion rate (revenue growth per existing customer), which was 137% during the quarter, up from 132% in Q3 2019.
Despite gaining 244% in 2020, Cowen analyst J. Derrick Wood raised Twilio’s target price in mid-December by $45, to $420, calling it one of its best picks for 2021.
“We remain confident that sustained growth momentum will continue to help drive outperformance,” he says.
- Market value: $21.7 billion
- Analysts’ opinion: 11 Strong Buy, 4 Buy, 1 Hold, 0 Sell, 1 Strong Sell
Etsy (ETSY, $172.08) came of age both as a company and a stock in 2020.
By operating a one-of-a-kind e-commerce platform for unique handcrafted goods, Etsy was able to stand out from all of the other brick-and-mortar retailers offering their unremarkable products online during the pandemic.
Etsy, which boasts 3.7 million active sellers worldwide offering unique products to 69.6 million active buyers, provides a marketplace like no other. Expect 2020’s holiday numbers to be solid as shoppers looked for more personal gifts.
Currently, Etsy has an estimated 5% market share of the $100 billion market for “special” retail items. Expand that to include all retail categories across its six geographic regions, and it has a total addressable market of $1.7 trillion.
Remarkably, of its approximately 46 million active buyers at the end of 2019, 59% shopped only once during the year, providing a tremendous opportunity to grow its customer loyalty.
In the third quarter of fiscal 2020, Etsy had gross merchandise sales (GMS) of $2.63 billion, 2% lower than in the second quarter, but 119% higher year-over-year. Meanwhile, revenues shot up 128% to $451.5 million, and sales were 5% higher sequentially despite the 2% decline in GMS.
In the fourth quarter, Etsy expects GMS growth of at least 65%, revenue growth of 70% and adjusted EBITDA margins of at least 24%.
Etsy stock was the second-best S&P 500 stock of 2020, behind only Tesla (TSLA), by virtue of quadrupling across the year. It almost certainly won’t match that in 2021, and it might struggle early, but ETSY could nonetheless finish the year as one of its best growth stocks.
- Market value: $1.6 trillion
- Analysts’ opinion: 35 Strong Buy, 11 Buy, 1 Hold, 0 Sell, 0 Strong Sell
Amazon.com (AMZN, $3,186.63) CEO Jeff Bezos will have a difficult time matching his 2020 increase in wealth. Over the past year, Bezos saw his net worth increase by roughly $75 billion thanks to his company’s stock performance.
Despite spending $4 billion in 2020 to keep its warehouse employees safe, combined with the fact that Amazon had to hire almost 430,000 people since March to keep up with the increased demand for online shopping, profits and sales went through the roof.
During 2020’s first nine months, Amazon’s sales jumped 35% to $260.5 billion, filtering down to a $14.1 billion profit – 70% higher than in the year-ago period. Free cash flow, which enables AMZN to continue investing in the future, was $29.5 billion for the trailing 12 months ended Sept. 30. That’s 26% higher than a year earlier.
And remember: That takes into account the $4 billion Amazon spent on COVID-19 safety measures.
Going into 2021, investors should watch what Amazon is doing on the healthcare front, though admittedly, its path ahead isn’t quite what many expected.
Haven, the once-exciting healthcare joint venture among Amazon, JPMorgan Chase (JPM) and Berkshire Hathaway (BRK.B), is reportedly disbanding to start the new year. But there are reports that Amazon intends to expand its its Amazon Care health service beyond its employees to other large companies looking to provide virtual health care.
“Amazon Care offers a convenient way to connect to a clinician to access healthcare services without an appointment, or to access care when you have an urgent medical need,” states the Amazon Care website. “Afterwards, Care Medical’s clinicians will post a Care Summary to the app with information about your diagnosis and any prescriptions or follow-up actions you should take, which will help you update your other doctors.”
Meanwhile, in November, Amazon launched Amazon Pharmacy, which offers home delivery of prescription medications. That could begin making a dent in the industry as soon as this year.
As long as Amazon continues to find new ways to generate revenue beyond its traditional e-commerce platform, it remains one of the best growth stocks you can buy.