Wall Street loves companies that consistently post double- or triple-digit sales growth. These stocks usually excel in bull markets, but they can also be crushed when their growth starts slowing down or they’re unable to squeeze out meaningful bottom line growth.
Let’s take a closer look at three stocks that could double their revenues this year — LogMeIn(NASDAQ:LOGM), Snap (NYSE:SNAP), and Invitae (NYSE:NVTA) — and the risks that their high-growth business models could face.
LogMeIn provides cloud-based connectivity services for collaboration, IT management, and customer engagement. Its core products let users access remote computers. The company also acquired password management platform LastPass in late 2015, and bought Citrix‘s (NASDAQ:CTXS) GoTo family of collaboration products earlier this year.
Steady demand for its services helped LogMeIn consistently post double-digit sales growth. Its revenues rose 22% in 2015 and 24% in 2016. But looking ahead, analysts expect the integration of Citrix’s GoTo business to cause LogMeIn’s revenues to soar nearly 200% this year before normalizing to 15% growth in fiscal 2018. Its earnings are expected to rise 85% this year and 26% next year.
That acquisition has notably distorted LogMeIn’s trailing valuations. The stock nearly doubled over the past year, and trades at nearly 1,000 times earnings, but its forward P/E of 36 (which accounts for GoTo) looks reasonable and remains much lower than the industry average of 54 for application software makers.
Snap, the parent company of Snapchat, recently made its public debut with an IPO that initially surged over 70% from $17 to almost $30. However, the stock quickly gave up most of those gains as fundamental gravity kicked in. But even at $21 per share, Snap is valued at $24.4 billion, and its stock trades at 60 times last year’s sales of $404.5 million. The company generates most of its revenue from ads and branded filters.
Snap still isn’t profitable, and its daily active user (DAU) growth has been slowing down over the past few quarters. DAUs rose just 3% sequentially to 158 million in the fourth quarter, compared to 7% growth in the third quarter and 17% growth in the second quarter. Some analysts attributed that slowdown to Facebook‘s (NASDAQ:FB) introduction of new Snapchat-like features for Instagram and Messenger.
Despite all those challenges, analysts expect Snap’s sales to more than double to $1.03 billion this year. That figure was mainly based on Snap’s own declaration that it could hit $1 billion in revenues this year as it expands its user base and forges new advertising partnerships. But even if Snap can achieve that — and there’s plenty of doubt that it can — its stock will still remain very richly valued.
Invitae uses software tools to process DNA samples, analyze information about genetic conditions, and generate test reports for clinicians. Its customizable tests screen for multiple genes associated with hereditary cancer, neurological disorders, cardiovascular disorders, and other conditions.
Invitae is a small-cap company with a market cap of just over $420 million, but it’s growing rapidly. The company went public in early 2015, and it’s posted triple-digit sales growth for five straight quarters. Revenue rose 191% annually to $9.2 million during its fourth quarter, and hit $25 million for the full year.
Analysts expect Invitae’s revenue to rise another 148% to $62.1 million this year. Invitae plans to achieve that target by doubling its sample volume, commercially launching a 20,000-gene medical exome, and securing additional biopharma partnerships to expand its Invitae Genome Network. But here’s the catch — Invitae isn’t profitable, its losses are widening, and the stock is very pricey at 17 times trailing sales. Therefore, Invitae’s an interesting stock to keep an eye on, but it remains a highly speculative play.
The key takeaways
Sales growth is important, but it’s important to know where that growth is coming from. Logmein’s triple-digit growth comes from an acquisition, Snap’s growth is based on its own promises, and Invitae’s growth will be boosted by its growing sample volume and the expansion of its ecosystem. Of these three companies, only Logmein is profitable — which could give it more downside protection than unprofitable companies during market downturns.
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