The 5 Best Growth Stocks for 2021
Since its inception, the annual return of the S&P 500 is around 10%. Any investment with a similar return would be a sound investment. But not all investors are content with 10% in annual profits. For those investors looking to take on a little more risk for the chance at outsized returns, we’ve put together this list of the five best growth stocks for 2021.
What makes growth stocks so appealing is they’re expected to increase revenue at an above-average pace for their industry. But their balance sheets don’t usually show an increase in cash on hand. That’s because a company focused on growth reinvests profits into itself for the sake of future growth.
A notable example is Amazon (Nasdaq: AMZN), which famously went years without being profitable in the classic sense. Instead, CEO Jeff Bezos took any profits Amazon saw and reinvested them back into the company. The rest, as they say, is history.
Amazon went from a humble book-selling website based out of a rented garage into the premier e-commerce giant we know today. And any investors savvy enough to have jumped into the company in its early days would be sitting pretty these days. A $10,000 investment in the company when it IPO’d back in 1997 would now be worth more than $12 million.
That’s exactly why growth stocks are so appealing. They come with the chance of turning a healthy sum into a fortune. But for every blockbuster growth stock, there are plenty that just don’t make it.
A Cautionary Tale on Growth Stocks
Remember the heady days before the dot-com bubble? There were scores of companies following a model similar to Amazon’s. Pets.com offered all sorts of treats and supplies for our furry friends. And it went out of its way to offer cheap shipping to attract customers. In this case, future growth wasn’t in the cards. Just months after its IPO, Pet.com went the way of the dodo.
Grocery delivery service Webvan.com followed a similar trajectory. The company grew quickly. Too quickly, in fact. Back in 1999, it was planning to expand to 26 cities. At its peak, it had a market cap of $1.2 billion. But Webvan.com never quite caught on. And the company shuttered its doors in 2001.
And the list goes on… The online startup eToys.com was one of the most popular holiday shopping websites in the country in the late ’90s. After its IPO in 1999, shares of eToys.com briefly traded upward of $80 a pop. By March 2001, they were worthless.
So it’s worth keeping in mind that with the hope for outsized returns comes increased risk. But there are some key metrics to consider when looking for growth stocks.
The best growth stocks typically trade at a higher price-to-earnings (P/E) ratio. This ratio helps evaluate a company based on its current share price in relation to its earnings per share (EPS).
That being said, young growth stocks might not have earnings to show. And because most growth stocks focus on reinvesting profits to ensure long-term growth, most don’t pay out dividends. This also raises the risk level because the only way to profit from investing in a growth stock is by selling the shares.
For investors comfortable operating in this risk/reward matrix, there are lots of opportunities out there. But not all opportunities are equal…
Also, if you want to see how your investments can grow before you start investing, check out our free investment calculator.
The Five Best Growth Stocks for 2021
- Sunnova Energy (NYSE: NOVA)
- Amazon (Nasdaq: AMZN)
- Dropbox (Nasdaq: DBX)
- PayPal (Nasdaq: PYPL)
- Salesforce (Nasdaq: CRM)
We’re starting this list with one of the riskier growth stocks. Though it operates in 22 states and and territories already, Sunnova Energy just went public in July 2019. So the company doesn’t have a long track record to look at. But there are many reasons to be excited by the information we do have.
The company has a list of customers totaling more than 100,000 – and growing. And its revenue is increasing at a similar pace. Analysts are anticipating double-digit percentage growth in the near future. Also, because the solar power industry has a lot of room to grow, Sunnova’s pack-leading position could lead to big gains as the technology becomes more ubiquitous. The company now also offers solar loans (which are proving to be a big moneymaker). It also has lower overhead costs than others in the industry because of an array of partnerships with local installers. All of this makes Sunnova a solid candidate for one of the best growth stocks for 2021.
Just because a stock has been around the block a couple of times doesn’t mean it doesn’t have room to grow. And that’s certainly the case for Amazon. Despite its megacap status, at more than $1.5 trillion, Amazon still performs like a small and agile growth stock.
With a P/E ratio above 70, Amazon might seem like a risky bet if it weren’t so big. On top of that, its EPS growth is expected to come in around 30%… which handily outpaces the greater markets. Not content with controlling e-commerce in the U.S., Amazon has made great strides in Australia, India, Brazil and Mexico in recent years. That’s why Amazon Prime is expected to have more than 250 million members in the next five years. That’s close to double the current figure.
Cloud computing is nothing new, and neither is Dropbox. But more and more companies and individuals are leaning into cloud-based file storage to stockpile their data. This is thanks in no small part to the fact that moving to the cloud is cheaper than investing in new, expensive hardware for the same purpose.
It’s just a lot easier to pay a small monthly fee for a service that does the same thing. And Dropbox’s year-over-year revenue growth backs that sentiment up. Yet it still has a long way to go before it achieves market saturation. Its customer base has been steadily increasing over the last five years. And on top of that, the average user has been gradually paying more each year. That’s why this is one of the best growth stocks for 2021.
PayPal is well-known for the charge in the digital payment industry. But it’s also proven to not rest on its laurels. It acquired the popular payment app Venmo a while back. And PayPal’s Innovation Lab is constantly looking at new ways to transform financial technology through new research and development.
PayPal’s earnings are expected to grow by more than 20% over the next 12 months. Evidently, a lot of users have just recently discovered the wonders of digital payments. Venmo’s payment volume went up 48% year-over-year. And PayPal itself generated $21.4 billion in revenue last year. That’s a 20.9% increase year-over-year. But if digital commerce trends continue, PayPal could blow 20% revenue growth out of the water. That’s why it makes for one of the best growth stocks for 2021. This high-flying business has come a long way since its IPO back in 2004. And that’s due in part to following the growth model.
There’s still a lot of money to be made up in the cloud. And Salesforce knows that first-hand. Salesforce had the privilege of joining the Dow Jones Industrial Average not long ago. But that doesn’t mean it’s done growing.
This customer-relationship-management company has improved its revenue by roughly 20% every year for the past five years. In fact, it was the first cloud computing company to reach $1 billion in annual revenue. Since doing so back in 2009, Salesforce has continued to break revenue records in its industry. And its stock price has followed suit.
Salesforce has leveraged its rapid growth by building lucrative deals with the likes of AT&T (NYSE: T) and Workday (Nasdaq: WDAY)… which have all but cemented Salesforce’s presence as a leader in this growing industry.
The Bottom Line on the Best Growth Stocks
When it comes to investing, growth is good. But growth stocks do come with their fair share of risk. No matter how big or small a company is, if investor expectations aren’t met, it can quickly send even the best growth stock into a tailspin.
That’s why it’s always important to make sure you’ve diversified your portfolio. Investing in growth stocks has the potential to bring lots of rewards. But balancing growth stocks out with value stocks can bring peace of mind and stability.
In the quest to build wealth, there are investment opportunities of all kinds. And growth stocks can certainly be a means to get there… If you’ve got the risk tolerance for them.
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About Matthew Makowski
Matthew Makowski is a senior research analyst and writer at Investment U. He has been studying and writing about the markets for 20 years. Equally comfortable identifying value stocks as he is discounts in the crypto markets, Matthew began mining Bitcoin in 2011 and has since honed his focus on the cryptocurrency markets as a whole. He is a graduate of Rutgers University and lives in Colorado with his dog, Dorito.