Three growth stocks that can deliver good returns
Megacap growth stocks have dominated the market, but there is still value in smaller companies, such as the three growth stocks we look at in this article. – Two of these stocks have been beaten down lately, giving investors an opportunity to buy now. – Another stock is a leader in a fast-growing industry and on track for strong margin expansion. While many stocks look expensive, these three are all great values at less than $100 each. The S&P 500 set one all-time high after another in 2024. The benchmark index ended the year up 23 percent, and that comes on the back of a stellar 2023 when the index climbed 24 percent. But for many stocks, prices have climbed faster than improvements in the underlying fundamentals. Investors would not be wrong to think that stocks are expensive right now. But even in an expensive market, there are still opportunities for investors. Although most of the S&P 500’s growth was driven by just a handful of megacap growth stocks, smaller stocks still represent a big opportunity. With just $100, investors can buy shares of any of the following growth stocks at a price that’s more than reasonable.
1. Uber
Uber (UBER) is practically synonymous with “ride-sharing service.” The company has a dominant position in the market with over 161 million users on its app. That customer base creates a network effect that attracts more drivers to its platform around the world. And Uber has leveraged its network to expand into restaurant and food delivery as well as a small freight business. Both the ride-sharing and delivery businesses are showing strong growth. In the third quarter, gross bookings increased by 17% and 16% for ride-sharing and delivery, respectively, and the ride-sharing business saw significantly improved profitability. But several factors have weighed on the company recently. Uber’s subscription service, Uber One, was investigated by the FTC for being too difficult to terminate. In addition, the Federal Reserve suggested that it will make fewer interest rate cuts than originally expected in 2025, which could increase the cost of carrying debt for Uber. It currently has $11 billion on its balance sheet. The biggest threat to Uber, however, is the rise of autonomous vehicles. Alphabet’s Waymo and Tesla are both working on developing ride-sharing services using their own autonomous vehicles. But Uber’s huge scale and user base will be difficult to overcome. In fact, Alphabet decided to partner with Uber to launch its service in Austin and Atlanta. By handing over the job of managing customers and a fleet of vehicles to Uber, Waymo will grow quickly and focus more on ensuring its vehicles perform as expected. The effect of all this is that Uber looks to be a good value, priced at around $65 a share at the time of writing. That gives an enterprise value-to-sales ratio of just 3.4 and a forward multiple of price-to-earnings of 28. That said, analysts expect sales growth of 16 percent next year and earnings to grow even faster at 23 percent thanks to improvements in profitability. With good growth ahead, investors should be willing to pay that price for Uber stock.
2. Etsy
Etsy (ETSY), the marketplace operator for unique goods, has seen its business come under pressure over the past two years. It is currently undergoing a transition period focused on improving long-term growth in gross merchandise sales. But that comes with some short-term pain. Etsy is moving away from optimizing its website for immediate sales, instead focusing on the customer experience. That includes highlighting the marketplace as a prime destination for gifts and developing a loyalty program. It also made some changes to the merchant side of the business to discourage sellers from listing mass-produced products that all look the same. The results of the efforts are clear. The short-term pain came in the form of a 4.1 percent drop in gross merchandise sales. Etsy offset that pressure with a higher cap rate thanks to the switch to its own payment platform, increased sales of advertising services, and a small store fee to ensure merchants adhere to Etsy’s focus on unique merchandise. Etsy is doing a good job of managing its business amid a drop in discretionary spending (consumer durables). Consumers hit by higher prices on essentials like housing, food, and clothing pulled back on discretionary spending. But spending intentions are on the rise again and Etsy could see a strong rebound in sales as consumers unload their wallets in 2025. With a share price of $53 at the time of writing, Etsy stock is trading for 20 times analysts’ expectations for 2025 earnings. While it’s certainly a riskier stock, investors are getting a good value at today’s price for taking that risk. Investors need to be patient with Etsy, as it is more cyclical than many retailers. But if its efforts to foster long-term customer growth and loyalty work, it should see significant gains in the long run.
3. DraftKings
DraftKings (DKNG) is one of two dominant online sports betting and iGaming companies in North America. Online gambling is growing rapidly in America, with analysts expecting revenues to double between 2023 and 2029 as more states legalize sports betting and iGaming. DraftKings is well positioned to capitalize on the growth of the market despite the recent launches of smaller competitors. That’s because DraftKings has a couple of advantages. First, it has a strong brand and it partners with major sports franchises and entertainment networks to maintain that strength. Second, and perhaps more importantly, its scale gives it a data advantage over smaller competitors. Data is crucial for betting company operators. It is the lifeblood of setting accurate lines, ensuring the house has an edge. Data can help identify sharp bettors and reduce the risks of losing to them. It can also help develop new products such as live betting, player props and parlays in the same game. And it can offer better promotions to keep players engaged with its product. The growing market and DraftKing’s advantages led to strong results in 2024. In the 12 months ending in September, 9.3 million people used one of DraftKing’s products. That’s a 41 percent year-over-year increase. Management expects revenue to grow in line with its customer acquisition rate, and it is showing profitability improvements with an expected EBITDA margin of around 7.4 percent. For 2025, management expects its EBITDA margin to double as revenues rise by 27 percent to 35 percent year over year. At a price of $38 per share, DraftKing’s stock has an enterprise value that is roughly 20 times management’s 2025 EBITDA forecast. With strong margin improvement and a long trajectory of increasing sales, DraftKings should support very high earnings growth for many years to come. Despite its strong performance over the past two years, it may not be too late to bet on online gambling.
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