June 19, 2024

The Art of Investment

Mastering the Stock Market Strategies

4 Unforgettable Growth Stocks You’ll Regret Not Buying in the New Nasdaq Bull Market

6 min read

Growth stock deals abound, even with the Nasdaq Composite pushing to a fresh all-time high in 2024.

For the first four years of this decade, Wall Street was nothing short of a seesaw. In successive years, all three major stock indexes oscillated between bear and bull markets, with the growth-powered Nasdaq Composite (^IXIC -0.01%) taking the brunt of this volatility.

But after losing 33% of its value during the 2022 bear market, the Nasdaq Composite has been off to the races over the last 17 months. Since the green flag waved in 2023, the Nasdaq Composite has gained 60% and rocketed to fresh record-closing highs. There’s absolutely no question that Wall Street’s growth-focused index is in a relatively young bull market.

A bull figurine set atop a financial newspaper and in front of a volatile but rising popup stock chart.

Image source: Getty Images.

While some investors might be hesitant to put their money to work with the Nasdaq breaking to new highs, time has shown that it’s an undefeated ally. Though we’ll never know ahead of time when stock market corrections will begin, how long they’ll last, or where the bottom will be, we do know that every downturn is eventually (key word!) wiped out by a bull market rally. Buying great companies to position for these lengthy bull market rallies can make patient investors significantly richer.

Even with the Nasdaq Composite a stone’s throw from a record high, as of this writing, growth stock bargains can still be found by the opportunistic investors willing to seek them out.

What follows are four unforgettable growth stocks you’ll regret not buying in the new Nasdaq bull market.

Block

The first remarkable growth stock that’s begging to be bought with the new Nasdaq bull market stretching its legs is financial technology (“fintech”) up-and-comer Block (SQ -1.45%). Though competition in the digital payment space is ramping up, Block’s foundational operating segment and its push into digital payments are finding their respective marks.

This “foundational operating segment” is the company’s Square ecosystem, which provides everything from point-of-sale solutions and data analytics to loans for businesses. During the March-ended quarter, the Square ecosystem saw $50.5 billion in gross purchase volume (GPV) traverse its network, or $202 billion on an annual run-rate basis. For context, Square generated less than $7 billion in full-year GPV in 2012.

What makes the Square ecosystem such a promising cash-flow driver is that its solutions are resonating with an increasingly larger merchant base. Whereas 35% of GPV originated from businesses with at least $500,000 in annualized GPV in the first quarter of 2022, 39% of GPV in the latest quarter was traced back to these larger merchants. Since this is a transaction-driven platform, bigger businesses are Block’s ticket to higher gross profit.

The other key platform for Block is Cash App. This peer-to-peer digital payments platform closed out March with 57 million transacting active users and a monetization rate — i.e., Cash App gross profit less buy now, pay later (BNPL) contribution, divided by Cash App inflows — that expanded by 7 basis points to 1.48% from the prior-year period.

Block has consistently generated superior gross margin per active Cash App user than the cost to acquire new Cash App users. Leaning on its BNPL offerings and investing aggressively in Cash App solutions (e.g., Cash App Card) are ways it can meaningfully boost its profitability and cash flow by the second half of the decade.

Starbucks

A second unforgettable stock you’ll regret not adding to your portfolio with the Nasdaq lifting off in a new bull market is coffee chain Starbucks (SBUX 1.85%). Despite recently reporting what could arguably be regarded as its worst quarter in years, Starbucks enjoys undeniable competitive advantages that can benefit patient investors.

To start with the obvious, Starbucks sports exceptionally strong pricing power. No matter how much labor- or product-based inflation the company has contended with, it’s rarely had any trouble passing along price increases to its loyal and growing base of global customers.

Perhaps the top selling point for Starbucks is its 32.8 million active U.S. rewards members, as of the end of the fiscal second quarter (March 31). In exchange for a free drink and/or food item from time to time, rewards members usually have larger tickets, will save their payment information on their smartphone, and use mobile ordering to their advantage. In other words, rewards members are expediting lines and shortening wait times.

Don’t overlook the innovation Starbucks has consistently demonstrated over multiple decades. Although some of its newer drinks may not be hitting home with consumers, its drive-thru ordering board revamp during the pandemic, coupled with its evolving food offerings, have helped the company sustain and/or lift its operating margin.

Starbucks is also cheaper than it’s been in a very long time, based on its forward price-to-earnings (P/E) ratio. Its forward P/E of 19 sits about 31% below its average forward earnings multiple over the last five years.

A hacker wearing black gloves who's typing on a back-lit keyboard in a dimly-lit room.

Image source: Getty Images.

Okta

A third distinctive growth stock you’ll regret not scooping up with the relatively new Nasdaq bull market finding its footing is cybersecurity company Okta (OKTA -0.15%). While there’s been some concern about Okta’s valuation following the admission of a security breach in October 2023, the company’s operating performance has put those worries to bed.

One of the best aspects of cybersecurity is that it’s no longer an optional service. Businesses of all sizes with an online and/or cloud-based presence need to protect their sensitive information from robots and hackers who don’t care if the U.S. economy is thriving or struggling. As more data moves online and into the cloud, cybersecurity companies like Okta have enjoyed a steady uptick in aggregate customers and subscription revenue.

Okta’s success in identity verification is based on its cloud-native, artificial intelligence (AI) and machine learning (ML)-driven cybersecurity platform. Though this service isn’t perfect, as the breach in October confirmed, an AI- and ML-powered platform should be nimbler and considerably more efficient at identifying and responding to threats than on-premises solutions over time.

In the company’s April-ended quarter, it recognized a subscription backlog of approximately $3.36 billion (up 19% from the prior-year period) and was sitting on $2.32 billion in cash, cash equivalents, and short-term investments. Since Okta is cash-flow-positive, management has no concerns about aggressively investing in new identity solutions. Meanwhile, its hearty backlog should yield predictable operating cash flow no matter what happens with the U.S. economy over the next year.

Lastly, the 2022 acquisition of Auth0 can really open new doors in overseas markets for Okta, as well as expand its reach in the $30 billion consumer identity market.

Meta Platforms

The fourth unforgettable growth stock you’ll regret not buying in the new Nasdaq bull market is none other than social media maven Meta Platforms (META -0.05%). Even though Wall Street was less than thrilled with Meta raising its spending forecast, this is an industry leader with an extensive history of successful monetization efforts.

The foundation for Meta continues to be its social media assets. It’s the parent company of Facebook, the most-visited social site globally, as well as WhatsApp, Instagram, Threads, and Facebook Messenger. These extremely popular apps, along with Meta’s other social media assets, collectively attracted 3.24 billion daily active users during the first quarter. There’s not a social media platform that comes close to providing access to as many daily active users as Meta — and this is often reflected in its ad pricing power.

This is a good time to mention that Meta benefits from disproportionately long periods of economic growth. While recessions are an unavoidable part of the economic cycle, they resolve rather quickly. By comparison, a company like Meta, which generates almost 98% of its sales from advertising, reaps the rewards of economic expansions lasting for years.

Another reason to trust in CEO Mark Zuckerberg’s company is its deep pockets. Meta Platforms ended March with north of $58 billion in cash, cash equivalents, and marketable securities, and has generated over $76 billion in operating cash flow over the prior four quarters. With a treasure chest of cash at its disposal, Meta can comfortably invest in AI and its metaverse ambitions, even with the understanding that these innovations are likely years away from being major revenue drivers.

The final piece of the puzzle is Meta’s cheap valuation. Despite quintupling since its bear market low of 2022, Meta still trades at less than 13 times estimated cash flow for 2025. This represents a 14% discount to its average forward multiple to cash flow over the last five years.

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