Long-term investors who can handle short-term market fluctuations and are willing to wait to earn significant long-term gains will benefit the most from investing in growth stocks. These are early-stage companies that frequently operate in sectors with hyper-growth potential.
Over the long run, many growth stocks have outperformed the broader market, contributing significantly to wealth creation. Contrary to popular belief, you don't need plenty of cash to start investing in growth stocks. Here are two outstanding growth stocks under $30 that have the potential to generate significant long-term returns.
Growth Stock No. 1: Confluent
The creators of Apache Kafka co-founded Confluent (CFLT), a data streaming provider. It enables organizations to process and analyze real-time data streams on a large scale, making it a significant player in the data infrastructure space. It is currently trading at about $21 per share.
Confluent’s stock has dipped 7.7% year-to-date, compared to the S&P 500 Index’s ($SPX) gain of 17.3%.
Confluent enables businesses to use real-time data for various purposes, including fraud detection, predictive analytics, customer experience personalization, and more. Confluent's solutions are used in multiple industries, including finance, healthcare, and retail.
The company has a subscription-based revenue model. Subscription revenue increased by 27% in the second quarter, compared to the same quarter last year. Furthermore, customers with ARR (annual recurring revenue) of $100,000 or more increased by 14% year on year to 1,306 in the quarter.
Confluent's total revenue increased by 24% to $235 million, driven by the rapid adoption of Confluent Cloud, which grew 40% year on year. The shift to cloud-based solutions is a positive trend for Confluent because it increases recurring revenue. The company reported an adjusted profit of $0.06 per share.
At the end of Q2, the company's cash, cash equivalents, and marketable securities totaled $1.9 billion. In addition, the company generated $2.7 million in positive free cash flow (FCF) during the quarter. This financial strength will enable the company to continue investing in growth initiatives such as expanding its product offerings, entering new markets, and making strategic acquisitions.
In fiscal 2024, Confluent expects subscription revenue to increase by 24.8% to $910 million, with an adjusted net income per share of $0.20.
Though Confluent is a small company with a market cap of $7.04 billion, it is rapidly growing. Analysts predict revenue growth of 22.8% in fiscal 2024 and 22.3% in fiscal 2025. Furthermore, analysts also predict adjusted profits to grow by 415% to $0.21 per share in fiscal 2024, further increasing by 49.3% to $0.34 by fiscal 2025.
On Wall Street, Confluent stock is a “strong buy.” Of the 30 analysts that cover the stock, 21 suggest it is a “strong buy,” two recommend a “moderate buy,” six say it is a "hold,” and one suggests a “moderate sell.” The average target price of $30.57 suggests an upside of 41.5% above current levels. The Street-high target price of $40 implies that the stock could rally over 85% in the next 12 months.
Growth Stock No. 2: Cresco Labs
The cannabis industry is not for the faint-hearted. While cannabis stocks currently pose significant risks due to the legal status of marijuana in the United States, the industry as a whole is rapidly expanding.
Cresco Labs (CRLBF), headquartered in Chicago, is a leading multi-state operator (MSO) in the domestic cannabis industry. It has established a strong presence in key licensed markets throughout the country, specializing in cannabis cultivation, manufacturing, and distribution.
Currently trading below $2 per share, CRLBF stock has gained 30.6% YTD, outpacing the broader market's return.
Cresco Labs is best known for its "Sunnyside" retail brand, operating close to 72 dispensaries in 8 states.
Being a vertically integrated company, Cresco controls the production, processing, and sale of its cannabis products. This vertical integration enables Cresco to maintain quality control, cut costs, and increase margins across its operations. However, the delay in federal legalization has caused oversaturation in the U.S. cannabis market, affecting revenue for cannabis companies.
As a result, total revenue in the company's most recent second quarter fell 6.8% year over year to $184.3 million. However, adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at $54 million, up 33% from Q2 2023. The net loss for the quarter came in at $51.1 million, including a $61 million one-time charge related to the company's new tax position.
Cresco's debt-to-equity ratio (1.36) is high. At the end of the second quarter, it had $116 million in cash and cash equivalents and a $388 million senior secured term loan. Cresco generated $11 million in FCF during the quarter. It intends to strengthen its balance sheet over time, invest in its core growth markets, and pursue new business opportunities.
Furthermore, due to the company's revised tax position to file as a normal business, it expects to save $65 million in cash by 2024. Analysts predict that Cresco's revenue will fall 3.6% to $743.4 million in 2024, resulting in a $0.15 loss per share. However, the company may report a $0.04 profit in 2025, with revenue rising 6.12% to $788.8 million.
Overall, Wall Street remains optimistic about Cresco's long-term potential in the fast-growing cannabis industry. On average, analysts have rated it a "strong buy.” Of the eight analysts covering CRLBF, six have a “strong buy” recommendation, one has a “moderate buy” rating, and one suggests a “hold.”
The analysts’ average price target of $4.71 represents a potential upside of about 166% from current levels. Furthermore, its high target price of $14.3 suggests the stock has the potential to rally by 709% over the next 12 months.
While the company faces challenges today, the global cannabis market is expected to be worth $444.3 billion by 2030. Cresco Labs is well-positioned to benefit from the growth of this burgeoning industry, which could boost its bottom line.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
