Today, I want to talk about a couple early-stage growth stock opportunities that have emerged from the wreckage of the past five weeks. But first, let’s talk about the latest market news...
Searching for a Market Bottom
The past week has seen the market rebound on expectations of a massive $2 trillion economic stimulus plan that will help consumers and businesses get through the tunnel of productivity and financial devastation that this pandemic has created.
On the one hand this package is good news for the market. We’ve seen the U.S. is willing to backstop financial markets. It now appears willing to backstop a large swath of consumers and businesses too.
This will help buy valuable time that will reduce the risk of this forced recession turning into something worse. And it clearly is having a positive impact on stocks (for how long remains up in the air, however).
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On the other hand, the extent to which the government is having to go illustrates just how dire the situation is. This may just be the first package. Many lenders are offering businesses and consumers up to three months of loan forbearance if they can identify financial hardship directly resulting from COVID-19. Schools across the country are closed for now and with every passing day more are saying they’ll remain closed into May.
The glass-half-full perspective here is that none of this is a big surprise. We could see where this was going last week, and the market has priced much of the known information in at this point.
That could easily translate into a market that remains volatile but trades in a much tighter range as the realm of potential outcomes and the timeline to get back to “normal” become clearer (but still somewhat murky).
This is the bottoming process we all want, but it assumes things don’t deteriorate.
From an investor’s perspective the game plan now is to remain patient and be incredibly selective. By focusing on quality stocks that should do well in a wide range of outcomes investors should be able to skew their exposure to more of the stocks that will work in this uncertain economy, and away from those that won’t.
That said, what looks attractive right now? Here are two early-stage growth stock ideas.
2 Early-Stage Growth Stocks for the COVID-19 Rebound
Early-Stage Growth Stock #1: CrowdStrike (CRWD)
CrowdStrike, mentioned two weeks ago, still looks good, especially given a huge quarter that was reported on March 19.
The back story is that CrowdStrike is an $11.9 billion market cap company that provides cloud-based cybersecurity and endpoint protection solutions. Its platform currently deploys up to 10 modules through the cloud that secure and protect client endpoints, including laptops, desktops and IoT devices.
With all the people working from home there is high demand for this type of protection.
The company was born in the cloud, so is 100% developed for this delivery model. CrowdStrike has a very efficient platform that offers both immense power and tremendous flexibility. That adds up to a good value proposition for customers in a large and growing addressable market.
The best evidence of customer demand is growth. CrowdStrike has 5,431 customers (up 116% over a year ago) and is rapidly expanding sales with existing customers (net expansion rate was 124% in Q4).
In Q4 revenue was up 89% to $152.1 million, beating consensus expectations by $14.3 million. Adjusted EPS was -$0.02, beating by $0.06.
Big picture, this is one of the fastest growing cybersecurity companies out there and is becoming a heavy hitter in the endpoint security market. Revenue was up 93% to $481.4 million in fiscal 2020, and guidance suggests that will grow roughly 50% this year. Given the environment out there one would think management is being conservative with that guidance.
Shares popped after reporting but are not extended. Interested investors should be on the lookout to buy this one on dips and average into a position to hold for several years.
Early-Stage Growth Stock #2: Smartsheet (SMAR)
Smartsheet (SMAR) is a $5 billion market cap software company that was founded in 2005, went public in 2018 and is growing at a better-than 50% quarterly clip today.
The company has developed a flexible, cloud-based, low-code collaboration platform that helps teams organize, capture, manage, automate and report on their work at a huge scale. The result is the Holy Grail of corporate leader aspirations; more efficient processes and better business outcomes.
The market for Smartsheet’s products is mostly business users that just want to get more done, more quickly and with less hassle. That’s just about everybody. This often means a better solution than what was previously handled through email, spreadsheets and whiteboards. That, combined with a user interface that’s familiar (similar to MS Excel and Google Sheets), is why the company’s products have been spreading virally, reaching tens of thousands of customers of all sizes, including over 75% of the Fortune 500.
Perhaps most importantly, management has reported in the current environment, so investors have a relatively good feel for how this business is doing right now. On March 17 management reported that Q4 revenue rose by 51% to $78.5 million (beating by a slim margin) while adjusted EPS of -$0.13 beat by $0.03.
Customers that spend over $100,000 a year jumped by 138%, and those spending over $50,000 a year jumped by 116%. Also, management said it’s taking a balanced approach to guidance, but Q1 projected revenue growth of 40% to 42% landed right on consensus estimates. That’s a relative victory in this market.
The bottom line here is that Smartsheet has products that were in demand going into this pandemic and which should hold their fair share of customers during and after it. The chart looks neither terrible nor terrific at this point, so averaging in makes a lot of sense.
Those are two early-stage growth stocks that look promising now. If you want to know what others I’m currently recommending to my Cabot Early Opportunities advisory subscribers, simply click here.
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