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2 Smart Growth Stocks to Buy Right Now

Growth stocks, on average, have produced a 13.4% annualized return over the past 15 years, crushing the 8% average annualized return delivered by value stocks, according to S&P Global. In other words, even when accounting for the market crash in 2008, which saw the S&P 500 fall by more than 50%, growth has still outperformed value over the long term.

Of course, growth stocks tend to be more volatile investments, on average too. But if you can handle that volatility, I think it's smart to allocate at least a small portion of your portfolio to growth. With that in mind, Elastic (NYSE: ESTC) and Zoom Video Communications (NASDAQ: ZM) look like smart buys. Let's find out a bit more about these two growth stocks.

Image source: Getty Images.

1. Elastic

Elastic is a search company that builds self-managed and software-as-a-service (SaaS) offerings for search, logging, security, and analytics. At the core of its platform is the Elastic Stack, a set of tools that help clients ingest and store data from any source, then search, analyze, and visualize that data. Developers can use these tools to build custom solutions, or they can deploy three pre-built applications: Enterprise Search, Observability, and Security.

Elastic Enterprise Search is a workplace search engine that helps clients sift through corporate documents and data to find the right resource; this product also allows clients to add a search bar to websites or mobile apps. And Elastic Observability and Security help IT teams index and analyze data to resolve performance issues and remediate threats.

In general, Elastic's developer-first mentality and freemium pricing strategy have been powerful growth drivers. In fact, Elastic is the most popular workplace search engine by a wide margin, according to DB-Engines. And Forrester Research recently recognized the company as a leader in cognitive search.

These advantages have translated into a solid financial performance over the last two years.

Metric

Q1 2020 (TTM)

Q1 2022 (TTM)

CAGR

Revenue

$304.7 million

$672.7 million

49%

Free cash flow

($35.5 million)

$9.1 million

N/A

Source: Ycharts. TTM = trailing 12 months. CAGR = compound annual growth rate. Note: Q1 2022 ended July 31, 2021.

Elastic now has over 16,000 customers, up 32% from the prior year, and 780 of those customers have annual contract values that exceed $100,000. To add, Elastic also posted a net expansion rate of "slightly below 130%" in the most recent quarter, meaning the average customer spent nearly 30% more this year than last year.

In the last year, Elastic has expanded its partnership with Microsoft, a move that should help drive the adoption of its SaaS platform, Elastic Cloud. Currently, most clients manage their own deployments of Elastic Stack, but the company sees Elastic Cloud as a significant growth opportunity.

Looking ahead, management values its addressable market at $78 billion, meaning Elastic has plenty of room to run. More importantly, the company is executing on its growth strategy, as evidenced by its strong financial performance. That's why this stock looks like a smart buy.

2. Zoom Video Communications

Zoom has fundamentally changed the way many people interact online. During the pandemic, its meetings software saw widespread adoption as it played a critical role in connecting socially distanced friends, families, students, and employees. In fact, Zoom Meetings now holds a 50% market share in the video conferencing space, making it the most popular product by a wide margin.

But Zoom is more than a video conferencing company; it provides a video-first unified communications platform. This includes Zoom Rooms, a software-based conference room system that transforms the corporate office into collaboration suites. It also includes Zoom Phone, a cloud-based phone system designed to eliminate the need for costly onsite telecom hardware.

In short, Zoom is disrupting traditional corporate communications, addressing a total addressable market that management values at $91 billion by 2025. And the company is executing on a strong, customer-centric growth strategy, as shown by its incredible financial performance over the past two years.

Metric

Q2 2020 (TTM)

Q2 2022 (TTM)

CAGR

Revenue

$463.7 million

$3.6 billion

180%

Free cash flow

$46.3 million

$1.7 billion

501%

Source: Ycharts. TTM = trailing 12 months. CAGR = compound annual growth rates. Note: Q2 2022 ended July 31, 2021.

During the most recent quarter, revenue growth decelerated to 54% -- a number many companies would love to achieve -- but this is a natural response in the wake of Zoom's supercharged performance last year.

Even so, there were several bright spots. For instance, the company posted a net expansion rate of 130% for the 13th consecutive quarter, indicating a 30% uptick in average customer spend. And during the recent earnings call, management noted strong momentum with Zoom Rooms and Zoom Phone, the latter of which has now sold over 2 million seats. In total, the company now has 504,900 paying customers (i.e., counting companies with more than 10 employees), up 36% over the prior year.

Here's the bottom line: Zoom has established itself a leader in the video conferencing industry, but its platform offers a broad range of solutions that should be relevant whether people are working remotely or not. That's why this growth stock looks like a smart buy for long-term investors.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Elastic, Microsoft, S&P Global, and Zoom Video Communications. The Motley Fool has a disclosure policy.


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