Successful investors know that picking a stock involves far more than finding a company whose share price is spiking at the moment. The company needs to exhibit evidence of long-term potential that's built on a solid business foundation.
We asked a few Motley Fool contributors for some growth stock ideas to help you find stocks that meet those requirements, and they came back with Match Group (NASDAQ: MTCH), Yext (NYSE: YEXT), and Shopify (NYSE: SHOP). Read on to find out why.
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Betting on romance
Jeremy Bowman (Match Group): Online dating has changed the way people around the world look for love, and Match Group has been at the forefront of this shift over the last 20 years. The company owns dozens of brands including its namesake Match.com, OkCupid, PlentyofFish, and sites that are popular abroad like Meetic and Twoo. However, none of its properties have broken out like Tinder, the swipe-based dating app that has propelled both Match Group and the broader sector to strong growth.
The stock has broken out over the last six months, nearly doubling in that time, as excitement is building over opportunities to monetize Tinder with programs like the new Tinder Gold, its new premium subscription that offers additional features like "rewind," or correcting left swipes, or seeing who's liked you.
Tinder's paid member count grew by nearly 20% sequentially in the third quarter to more than 2.5 million, a sign that new products like Tinder Gold are resonating with its user base.
The company's subscription model should also help deliver operating leverage over the long term, meaning earnings will outgrow revenue, though that has not been the case recently, as the company is investing in new products like Tinder Gold. And beyond Tinder, there are significant growth opportunities ahead in international markets, new technologies like virtual reality, and new products and acquisitions.
Even after the stock's recent surge, Match Group still trades at a reasonable P/E valuation of about 30 based on 2018 expected earnings. With Match Group's long tail of growth ahead of it, investors would be wise to swipe right on the stock.
Reaching consumers effectively
Daniel Miller (Yext): No matter what consumers want to accomplish with their smartphones, there's almost certainly an app for that. In fact, Yext believes there is a fundamental shift going on right now where traffic is changing from a company's website platform to third-party sites such as Yelp, Google, and Facebook, among many others; Yext's proprietary study from February 2017 shows that third-party traffic averages 2.7 times more views than a company's website.
What does Yext do exactly? Think of Yext as a digital knowledge master that has all of the facts and information a business wants the public to know -- anything from if a random hotel is wheelchair-accessible, has Wi-Fi, and offers gluten-free food options. Think of Yext as a middleman between businesses and the plethora of apps that try to feed their own consumers business information. Businesses pay Yext to provide all of the apps with the most up-to-date information in a usable format. In return, Yext offers businesses a way to drive revenue more efficiently from online consumers while improving brand visibility and web traffic in general.
Yext offers businesses a number of subscription packages that range from a base product to an ultimate professional package with advanced analytics and other features. Typically, Yext inks contracts between one and three years with a strong retention rate, and the subscription-as-a-service provides recurring revenue. Yext's third-quarter revenue was up a strong 39% compared to the prior year, and its gross margins jumped 290 basis points to 73.7%, but it has lucrative long-term potential if it can continue to improve its customers' ability to reach and monetize consumers more effectively through the ever-growing number of apps.
A scrappy e-commerce platform
Chris Neiger (Shopify): Shopify is benefiting from two big trends right now: the rise of cloud-computing software and the growth of e-commerce platforms. The company creates its own software and services for mostly small- and medium-sized business, which allows those companies to set up their own online stores, sell products directly on their site or through Facebook and Amazon, manage their employees, etc.
The company sells a variety of plans that businesses can choose from, which has helped Shopify appeal to a wide variety of businesses. Back in 2015, the company had about 200,000 merchants using its cloud-based e-commerce platform, but that has spiked to over 500,000 now.
There's some evidence that Shopify should be able to continue growing as well, especially when you consider that the online shopping market is expected to grow from $385 billion in 2016 to $632 billion by 2020.
Shopify's subscription revenue jumped by 65% in the third quarter of 2017, and its merchant solutions segments sales popped 79%, both year over year. The company's overall sales increased by 72% as well. Shopify is also increasing sales of its high-end tier subscription as well, called Shopify Plus, and added Arby's and the Phoneix Suns NBA team to its client list in the third quarter. Monthly recurring revenue (MRR) from its Plus tier now accounts for 20% of the company's sales, up from 18% a year ago.
Shopify will release its fourth-quarter results in a couple of weeks, and management expects revenue to be $207 million at the midpoint, up about 59% from the year-ago quarter.
While Shopify is growing fast, investors should know that it's still not profitable right now. The company is also trading at about 438 times its forward earnings, which is quite a premium. But this young company is quickly adding to its top line and boosting its merchant numbers as well. Additionally, Shopify is benefiting from the growing online e-commerce platform market. For investors looking for a strong growth stock with a long-term perspective, Shopify is certainly worth a look.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Neiger has no position in any of the stocks mentioned. Daniel Miller has no position in any of the stocks mentioned. Jeremy Bowman owns shares of Match Group. The Motley Fool owns shares of and recommends Amazon, Facebook, and Shopify. The Motley Fool has the following options: short March 2018 $200 calls on Facebook and long March 2018 $170 puts on Facebook. The Motley Fool recommends Match Group. The Motley Fool has a disclosure policy.