Monday, March 4, 2024

Never Mind the FAANG Stocks; Buy the GHOST Stocks Before 2024

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A young couple keying credit card information into a smartphone screen

A young couple keying credit card information into a smartphone screen

Given its widespread use, most investors are likely familiar with FAANG, a well-worn acronym that refers to some of the best-performing companies of the past decade:

  • Facebook, which rebranded as Meta Platforms

  • Apple

  • Amazon

  • Netflix

  • Google, now known as Alphabet

Each of these companies dominates its respective industry, outflanking rivals and providing a windfall for long-term investors over the past 10 years.

Meta Platforms has three of the top five social media platforms worldwide under its umbrella. Apple boasts eight of the top 10 best-selling smartphones of 2022. Amazon controls nearly half of all e-commerce spending in the U.S. Netflix continues to be the largest subscription streaming service by a wide margin. Google search is unmatched, with 92% of the market.

Investors that held these stocks for the past decade have enjoyed a veritable windfall, with gains ranging from 392% and 871% — even in the wake of last year’s historic downturn (as of market close on Tuesday).

META Chart

META Chart

Yet it’s also clear that each of these pioneers is getting a little long in the tooth and growth has slowed in recent years. Investors are beginning to look for the next generation of industry leaders that will blaze the trail over the coming decade.

With that in mind, I created the GHOST acronym a year or so ago with a roster of companies that could lead the way in 2024 and beyond.

Global-e Online

Last year was a tough one for online retailers, but the macroeconomic challenges that held them back are waning. Global e-commerce sales are expected to grow from $3 trillion in 2023 to $5 trillion by 2028, according to data compiled by Statista. Cross-border sales will likely lead the way, thanks to Global-e Online (NASDAQ: GLBE).

The company makes short work of the pitfalls inherent in cross-border retail. This includes inter-country regulatory compliance, currency exchange, customs and duties, foreign languages, local payment methods, and more. This gives merchants the tools they need to do business in the lucrative global marketplace.

That’s why Shopify has a strategic partnership with Global-e, while also owning a 13% stake in the company, worth more than $775 million as of Tuesday’s market close. Shopify has roughly 1.7 million merchants, and Global-e is the company’s exclusive provider of cross-border services — a huge vote of confidence from the world’s largest provider of e-commerce tools.

For the first nine months of 2023, Global-e generated revenue of $385 million, which grew 43% year over year, while also cutting its loss based on generally accepted accounting principles (GAAP) by 36%. The company continues to generate strong operating cash flow on the way to consistent profitability.

As digital retail recovers from the economic downturn, Global-e Online is well positioned to benefit.

A young couple keying credit card information into a smartphone screen.

Image source: Getty Images.

HubSpot

While HubSpot (NYSE: HUBS) pioneered inbound marketing, the company has expanded into a full-service customer relationship management (CRM) provider focusing on small and medium-sized businesses. The company now offers marketing, sales, service, content management, operations, and commerce products, all from a single dashboard.

In the third quarter, HubSpot generated total revenue of $558 million, up 28% year over year, while cutting its net loss by 82%. The company has yet to generate a profit on a GAAP basis, but the combination of declining losses and consistent cash flow suggests profits are on the horizon.

Customers continue to flock to the platform, up 22% year over year, while the average subscription revenue per customer edged 3% higher.

As HubSpot increased its offerings, its opportunity has increased as well. Management estimates its current total addressable market (TAM) of $51 billion will climb to $77 billion by 2028. When viewed in the context of its 2022 revenue of $1.7 billion, the runway ahead seems long.

HubSpot’s cloud-native platform is leading the CRM space for the next generation.

Okta

When I first picked Okta (NASDAQ: OKTA) more than a year ago, the premise was simple: The company’s cloud-based identity verification and access management products were unmatched. Since then, however, the company’s reputation has fallen into question. Just last month, Okta revealed that hackers had accessed a report with the names and email addresses of all the users of its customer support system. Not a good look for a company focused on cybersecurity.

Its embarrassment notwithstanding, I believe Okta can come back from this, as the need for its services remains. Businesses everywhere must ensure that employees, customers, and contractors have the required credentials to access sensitive business systems.

In its fiscal 2024 third quarter (ended Oct. 31), Okta grew revenue by 21% year over year to $584 million, while its current backlog of $1.8 billion grew 16%. It’s optimal for the backlog to grow as fast or faster than current revenue, which is an indicator of strengthening demand.

This suggests that there’s some (understandable) hesitancy on the part of businesses to hitch their wagon to Okta in light of recent events. That’s also reflected in management’s outlook for fiscal 2025, which is guiding for revenue growth of 10%, a significant deceleration from its current level.

Don’t get me wrong; Okta has much work to do to repair the damage done to its reputation and earn back customer trust. That said, I believe management is up to the task, though the issue certainly bears watching.

Snowflake

While corporate server rooms and IT departments were once the keepers of data, applications, and other computer systems, the digital transformation is causing a paradigm shift, moving much of that to the cloud. The downside is that much of the information comes from disparate systems, making the extraction of actionable data challenging.

That’s where Snowflake (NYSE: SNOW) comes in. The company not only has the ability to store data and systems on its cloud-native system, but also provides a broad range of services to gather and analyze data, resulting in meaningful intelligence.

In its fiscal 2024 third quarter (ended Oct. 31), revenue grew 32% year over year, fueled by product revenue that also grew 34%. While the company has yet to report a profit, Snowflake generates strong operating and free cash flow of $102 million and $111 million, respectively, which suggests it’s merely a matter of time before the company is delivering continuing profitability.

Snowflake’s customer metrics help tell the tale. The company’s customer count grew 24%, but for its most lucrative clients — those spending $1 million or more in the trailing-12-month period — revenue grew 52%, which is elevating its growth. Furthermore, the company’s net revenue retention rate of 135% shows that existing customers tend to spend more over time.

As more workloads move to the cloud, Snowflake has the solutions that businesses need to make the digital transformation a reality.

The Trade Desk

When the economy turned south, digital advertising fell like a stone, as marketers scrambled to shore up their financial positions. As a result, several of the world’s largest online advertisers suffered year-over-year revenue declines. One notable exception was The Trade Desk (NASDAQ: TTD). While its advertising growth slowed, not only did the company continue to post gains, it also took market share at the expense of its big-name rivals.

Don’t take my word for it. Earlier this year, CEO Jeff Green said, “Our relative outperformance over the last few quarters means we have gained more market share than in any other period in our company’s history.”

He went on to note that as advertisers became “more deliberate” in their spending, The Trade Desk attracted new converts by giving marketers a greater return on their marketing investment. The company is not only attracting new clients; it’s also encouraging more spending from existing users.

One key attraction is The Trade Desk’s relentless pursuit of improvement. Over the past year, the company released Solimar — its latest platform upgrade — which allows marketers to deploy first-party data to improve targeted advertising results.

In the third quarter of 2023, The Trade Desk grew revenue 23% year over year to $1.3 billion, while its adjusted earnings per share of $0.84 grew 27%. Furthermore, customer retention remained above 95%, as it has for each and every quarter going back nine years. This is partially the result of the company’s transparent pricing, which should help it continue to steal market share for years to come.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Amazon, Apple, Global-e Online, HubSpot, Meta Platforms, Netflix, Okta, Shopify, Snowflake, and The Trade Desk. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Global-e Online, HubSpot, Meta Platforms, Netflix, Okta, Shopify, Snowflake, and The Trade Desk. The Motley Fool has a disclosure policy.

Never Mind the FAANG Stocks; Buy the GHOST Stocks Before 2024 was originally published by The Motley Fool

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