The Fed's ongoing rate hike campaign has pressured many growth stocks over the past year, as these companies often rely on debt to finance future expansion. Now, however, as recent data points suggest the Fed may be nearing the end of its tightening cycle - and the U.S. economy may actually manage a soft landing - growth stocks are once again back in favor.
And as interest rates eventually decline back toward more typical levels, growth stocks in particular should benefit from lower borrowing costs. With this in mind, here's a look at three stocks that are top-rated by analysts, and expected to outpace their peers on key growth metrics.
Dexcom
We start with San Diego-based Dexcom (DXCM), a medical device company that designs, develops, and commercializes continuous real-time glucose monitoring (CGM) systems for people with diabetes. Founded in 1999, DexCom's CGM systems are used by people with all types of diabetes, including type 1, type 2, and gestational diabetes.
With a market cap of $36.6 billion, Dexcom stock is down 15% in 2023 so far.
Dexcom posted a strong set of numbers for Q3 2023, marked by significant growth in both revenue and earnings. Revenues of $975 million represented a yearly growth of 26.7% while EPS of $0.50 grew by an even sharper 78.6%. The latter came in above the consensus estimate of $0.34, continuing a trend of topping analysts' expectations.
The company's operational strength is also reflected in the 14.5% yearly improvement in its net cash from operating activities to $614.9 million, with a cash balance of $3.24 billion at the end of the quarter. Meanwhile, the global release of Dexcom's new G7 product and the expansion of Dexcom ONE into new geographies could potentially contribute to greater adoption of its CGM technology within a significantly larger patient population.
Looking ahead, analysts have penciled in above-average revenue and EPS growth rates for Dexcom, with forward revenue growth at 20.71% (vs. the industry median of 9.14%) and EPS growth of 36.41% (vs. 4.12%).
Overall, analysts have a “Strong Buy” rating for Dexcom stock, with a mean target price of $128.78. This denotes an upside potential of roughly 34% from current levels. Out of 18 analysts covering the stock, 16 have a “Strong Buy” rating and two have a “Hold” rating.
Synopsys
Founded in 1986, Synopsys (SNPS) is a software development company that provides tools and services for the design and verification of electronic systems. The company has also made significant investments in artificial intelligence (AI) and machine learning (ML) to develop new tools that can help designers automate more of the design process. With more than 4,000 customers worldwide, Synopsys currently commands a market cap of $74.51 billion.
The share price for Synopsys has rallied 55.7% on a YTD basis.
In Q3 2023, Synopsys reported revenues of roughly $1.5 billion, up 19.2% from the year-ago period. EPS grew by 37.1% from the previous year to $2.88, coming in above the consensus estimate of $2.74. The company's EPS has surpassed expectations in each of the past five quarters.
The company ended the quarter with a cash balance of about $1.7 billion and an almost flat year-on-year net cash from operating activities of $1.38 billion.
In terms of future growth catalysts, SNPS has a market-leading position in the Electronic Design Automation industry with a 32% share. A wider tailwind in the form of customer preference for integrated EDA tools - such as the one offered by Synopsys - due to its cost- and time-saving features is also expected to drive the company's revenues higher. Further, the company's bet on AI to be a large driver of revenues in the future has also found traction.
Although Synopsys' valuation may appear to be on the higher side after its rally this year, analysts are forecasting above-average growth rates for the company. The consensus is looking for forward revenue and EPS growth of 16.13% and 22.83% compared to the sector medians of 8.65% and 7.87%, respectively, for Synopsys.
Overall, analysts have a “Strong Buy” rating on SNPS with a mean target price of $526.64. This represents an upside potential of about 5.6% from current levels. Out of 12 analysts covering the stock, 10 have a “Strong Buy,” one has a “Moderate Buy,” and one has a “Hold” rating.
ServiceNow
We conclude our list with another software company, ServiceNow (NOW). Founded in 2003 and based out of Santa Clara, Calif., ServiceNow is a cloud-based software company that provides IT service management (ITSM), customer service management (CSM), and other digital workflow solutions. Its platform helps companies automate and streamline their business processes, improve customer service, and increase efficiency.
Currently commanding a market cap of $124.89 billion, ServiceNow stock is up more than 55% on a YTD basis.
In Q3 2023, ServiceNow's revenues came in at $2.3 billion, up 25% from the year prior, while EPS of $2.92 rose 49% from the year-ago period. Quarterly earnings comfortably outpaced the consensus estimate of $2.56, just like in the previous four quarters.
Operationally relevant metrics for a platform company, such as current remaining performance obligations ($7.43 billion, up 27% YoY) and $1 million+ annual contract value customers (1,789, up 17% YoY), improved during the quarter - indicating healthy demand for its products.
ServiceNow's diverse customer base, headlined by 19 federal deals over $1 million in the latest quarter, makes it less vulnerable to sector-specific shocks. Notably, in Q3, ServiceNow clocked in 100% YoY growth in the transportation and logistics, education, manufacturing, and CMC sectors.
Also, the company recently launched its generative AI-powered Now Assist platform, which has already elicited interest from over 300 customers. Further, the company is leveraging the power of AI to improve its workflow automation platform, Creator Workflows.
Analysts are expecting ServiceNow to report industry-beating revenue and EPS growth. While forward revenue growth is pegged at 22.46% (vs. the industry median of 8.65%), EPS growth is expected at 61.37% (compared to the sector average of 6.97%).
Overall, analysts have a “Strong Buy” rating on the stock, with a mean target price of $638.71 - indicating an upside potential of about 3% from current levels. Out of 32 analysts covering NOW stock, 28 have a “Strong Buy” rating, two have a “Moderate Buy” rating, and two have a “Hold” rating.
