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For anyone looking to outperform the average market return, growth stocks are worth keeping an eye on. They are not as flashy as some big-name stocks. They also don't pay income like the dividend kings. They require research to unearth and even then you have to tread very carefully to make sure you don't overpay for the hype. Still, I think it's worth it. Here are two I have my eye on today.
The US social networking site reddit (NYSE: RDDT) went public in March at $46 a share. I briefly considered the stock at the time, but felt there were too many downsides.
The site hosted a user base that is notoriously difficult to monetize, especially compared to other social media sites. The company had never made a profit despite being in operation since 2005. The price-to-sales ratio was about 15. That's not a typo. I don't mean to write profits. It actually traded at 15 times sales.
And the icing on the cake was the exorbitant remuneration of the board of directors. In 2023, the CFO pocketed $93 million and the CEO $193 million. These are eye-popping pay packages compared to the $800 million revenue of a loss-making company.
Since then, the share price has risen to $141, nearly tripling in about eight months. The growth certainly made me stroke my chin. Is it time to back this horse?
Well, the firm has had a very good year. Advertising revenue has grown. Using ai to translate articles into other languages has also helped grow its user base. Reddit also got a boost by lending its content to Google and OpenAI to train their ai models. All of which resulted in the company's first profits.
While the transition to making money is helpful, I can't ignore that the ai license is expected to be a temporary boost, not a permanent one. And if future numbers fall back into the red, this will look really expensive. I will avoid it.
dutch brothers
Another US stock that has piqued my interest recently is the coffee chain. dutch brothers (NYSE: BROS). The fast-growing chain went public in 2021, soared like a rocket, then crashed by 70%. However, the stock is up 126% since last September, so things seem to be going better now.
The obvious comparison here is with the market leader. starbucks. Dutch Bros is still small. It has 900 stores compared to Starbucks' 17,000. Its $8 billion market capitalization is dwarfed by its older brother's $117 billion. That's not to mention the many other players on the market. A large slice of the pie is offered here.
The up-and-coming company's unique selling proposition is in its customer service. Baristas don't serve you, but “of brothers”. While waiting at the window (Dutch Bros operates drive-through), expect lots and lots of chatter. Management likes to say that they are in “the people business, not the coffee business.”
However, a forward P/E ratio of 107 is quite exorbitant. With increasing talk of a possible US recession in 2025, it is too expensive for me to buy now. But I'll keep it on my watch list in case a better entry point emerges.
