Although the SP500 and other market cap weighted indexes are likely to continue to produce returns in the long run, It’s not always a good idea to buy individual stocks on downturns. Many individual stocks that are down 70, 80, and 90% from their Post-Covid highs will never return to those levels because of multiple compression, market structure, and investor sentiment.
For a stock that is down 90% to return to it’s highs the stock must rally a whopping 1000%, a ten-bagger, as it’s called in the investing community is one of the most sought after investments because it will drive your portfolio returns. These investments don’t happen overnight though, and if they do the likely results is a bloodbath similar to the one we’ve witnessed over the last 12 months in the high growth tech scene. The market historically has doubled your investment over 7-10 years so many investors strive for ten baggers in a similar time frame. If you can do that you have effectively 10x the average return of the market in that time. Undoubtedly these investments come with a ton of risk, and unless we sit down and talk about your risk tolerance none of this is advice. These 2 investments are strong companies with extraordinary management teams and growth potential in the future.
Crowdstrike
Crowdstrike is a dominant player in the cybersecurity space with it’s cloud-native platform Falcon. It offers threat intelligence, managed security services, IT operations management, threat hunting, Zero Trust identity protection, and log management. The company primarily sells subscriptions to its Falcon platform and cloud modules through its direct sales team that leverages its network of channel partners. It serves customers worldwide. Although Crowdstrike had success in its early days with small and medium businesses the company has moved upstream to large enterprise customers, which has proven to be much more lucrative. The expansion of their modular system creates a higher margin business with great cash flow and growing utility.
Currently, Crowdstrike is trading at a multiple of over 100x next year’s earnings. This appears to be quite high compared to the market multiple of 16x, but when you take into account it’s revenue growth of over 60% it becomes much more tolerable. The growth will not only be steady but all current revenue streams have proven to be extremely sticky, meaning there is little turnover in the business they have. Crowdstrike’s current management is extremely diligent and reliable. CrowdStrike’s stock trades at about 18 times its new sales forecast for fiscal 2023. That price-to-sales ratio might seem high, but it’s in line with other high-growth cybersecurity companies like Zscaler (ZS -5.66%) and SentinelOne (S -2.44%). Zscaler, which expects to grow its revenue 60% this year, trades at 21 times that estimate. SentinelOne, which expects its revenue to nearly double this year, trades at 17 times that forecast — but it still remains deeply unprofitable by non-GAAP measures.
CrowdStrike now expects its revenue to rise 52% to 53% year over year in the second quarter and 51% to 52% for the full year. That was significantly higher than its prior full-year guidance for 47% to 49% revenue growth. It expects its non-GAAP net income to grow 151% to 162% year over year in the second quarter, and to increase 76% to 83% for the full year. That was also higher than its prior full-year guidance for 56% to 70% net income growth. During the conference call, CFO Burt Podbere said CrowdStrike raised its full-year guidance because it remained “optimistic about the demand for our offerings, record pipeline, and our ability to execute on the powerful secular trends fueling our markets.”
Although Crowdstrike will likely remain quite volatile over the next few months or even years. It still works out to be a worthwhile investment for investors looking at the long-term growth prospects of a dominant player in a secular growth industry like Cybersecurity.
Enphase
Enphase Energy is a producer of a software-based home energy solution that cover solar generation, home energy storage and web centered monitoring and control. The company offers semiconductor-based microinverter, which converts energy at the individual solar module level, and combines with its proprietary networking and software technologies to provide energy monitoring and control services. It also offers AC battery storage systems; Envoy communications gateway; and Enlighten cloud-based monitoring service, as well as other accessories. The company sells its solutions to solar distributors; and directly to large installers, original equipment manufacturers, strategic partners, and homeowners, as well as through its legacy product upgrade program or online store. The stock itself has outperformed the S&P500 by almost 40x since its inception. The company is growing at a rapid pace, expanding margins, and has a competent management team. With energy prices soaring, the tailwind behind solar technology only becomes greater. Investments in solar energy become more economical as gas prices rise across the world.
Taking a look at the numbers, the company’s revenue is expected to grow by 40%+ over the next year. With that impressive growth in combination with EBITDA margin expansion from 15% to 17% this company stands out from it’s peers in the industry. In addition, Enphase is currently buying back approximately 3 million shares every year, giving shareholders a natural return on investment, similar to a dividend. The shares are currently trading at 12x next year’s revenue and 56x next year’s Earnings Per Share. With EPS growth of 54% projected by analysts this gives the stock a PE/Growth ratio of nearly 1, the holy grail of value investments. Enphase is taking several steps to continue growing rapidly. It is launching new products and making constant improvements in existing ones, and is looking at acquisitions. Recently, the company acquired ClipperCreek, a manufacturer of electric vehicle chargers. Enphase plans to sell the chargers along with its existing products, linking them to the Enphase app. This will help its buyers to optimize tariffs and charge their vehicles using solar power.
Although the stock will likely fluctuate in the near term due to interest rates and the conflict in eastern Europe, the long term growth prospects for this company are promising.
Whats Next?
Due to the current downtrend in the tech and growth stock space, it’s unlikely that these investments would produce outsized returns in the near term, however, with a longer time horizon, these companies are sure to create value for shareholders at a faster rate than the S&P500 as a whole, which is what makes a great investment.
If you’re interested in this investment or other investments like this, contact an expert today
