3 Top Growth Stocks to Buy Hand Over Fist in February | The Motley Fool (2024)

The S&P 500 index is up 21% over the past year and has already set several new all-time highs in 2024. While the market overall is growing well of late, some individual growth stocks are still trading at low valuations that could set the stage for big returns over the next few years.

Let's find out why three Motley Fool contributors believe Toast (TOST 5.12%), Walt Disney (DIS 0.53%), and Coupang (CPNG 0.07%) are due for a rally in the new year.

An early-stage opportunity at a great price

Jennifer Saibil (Toast): It's hard to find great early-stage opportunities. Investors often pounce on great stocks before the general public has a chance to hear about an initial public offering, and top stocks can reach high valuations before they hit many people's radars. So when a great stock's price tanks, it can be a blessing in disguise.

That's what's been happening with Toast. Toast is a catchy name for a disruptive tech stock in the restaurant industry. That may not be the place investors expect to find the next big thing, but Toast is making waves with its software-as-a-service (SaaS) platform that exclusively serves the restaurant industry. It has set out to distinguish itself as a leader by focusing on one specific niche and offering the most comprehensive suite of solutions to fill that niche, with any kind of hardware or software a client could need.

It has been reporting incredible growth despite the sour economic climate. Annualized recurring revenue increased 40% year over year in the 2023 third quarter, and it added more than 6,000 new locations in the quarter for a total of 99,000. If that sounds like a lot, it's still a small percentage of what it perceives as its serviceable addressable market today, and a tiny fraction of the overall global restaurant industry, where it envisions expanding.

However, Toast is one of those high-growth, unprofitable tech stocks that investors have grown wary of. Although gross profit increased 50% year over year in the third quarter, and net loss was about a third of what it was in 2022, the loss still came in at $31 million.

With the bull market of the past 15 months now officially recognized, investors who have been waiting on the sidelines tend to grow more favorable toward these kinds of stocks, and they could finally embrace Toast stock. Toast is down 21% over the past year, but it reports fourth-quarter earnings in February. It trades at a price-to-sales ratio of only 2.5, a cheap valuation for high-growth status, and if it reports solid results, Toast stock could skyrocket.

The magic is coming back

Jeremy Bowman (Disney): It's no secret that Disney stock has been volatile over the past couple of years. Part of the entertainment giant's issues recently revolve around its sluggish reaction to the shift to streaming, and its efforts to play catch-up have weighed on the bottom line. Its streaming division has been generating losses and profits from its linear TV business have been quickly drying up.

However, Disney appears to finally be turning the corner. Management has said that its streaming division will be profitable by September 2024, or the end of this fiscal year, but that could happen sooner as the company raised prices on its streaming services significantly in October 2023. Prices for the ad-free version of Disney+ rose from $11 a month to $14 a month, while the ad-supported plan stayed at $8 a month.

That strategy worked well for Netflix, which just reported its strongest quarter of fourth-quarter subscriber growth ever and has seen strong adoption for its ad-based tier.

Meanwhile, Disney appears to be making moves to leverage some of its linear media assets. It's held talks with the NFL about taking a stake in ESPN. It's also received interest in ABC and its cable channels from buyers, and it's in the process of merging its Indian TV entertainment business with Reliance Industries, a local company. Any of those moves would likely boost investor confidence in the business and should help lift the stock price.

Finally, Disney's theme parks business remains a fast-growing cash cow, and the company said it would nearly double its capital spending on its theme parks over the next decade, which should drive profits higher.

Disney has a lot of upside potential if it can show that it's able to deliver steady bottom-line growth, and that could start in its first-quarter earnings report in February.

This stock is for those who missed out on Amazon

John Ballard (Coupang): eMarketer expects the $5.7 trillion e-commerce market to grow to $8 trillion by 2027, making it a ripe field to look for winners in the next bull market. If you're going to buy a growth stock hand over fist, lots of growth isn't enough. You should look for companies that are turning a profit, are leading their respective market, and can grow for a long time. South Korea's popular online retailer Coupang fits this criteria perfectly. It's a bonus that the stock trades at a cheap valuation.

Coupang's WOW membership service offers customers free shipping and content streaming, which is a page taken right out of Amazon's playbook, and it's reporting similar results. Revenue growth accelerated in 2023, with third-quarter revenue up 21% year over year, but it's got a long runway of growth.

With only a single-digit share of the total retail market, Coupang can grow at high rates for a long time. More importantly, it's a profitable business generating $1.9 billion in free cash flow. The company has ample resources to invest in expanding its selection to win a greater share of retail spending.

The future for this fast-growing e-commerce company is bright. The best part is that investors can buy the stock at a cheap price-to-sales (P/S) ratio of 1.1, a big margin of safety compared to the P/S multiple of 2.6 for the average stock in the S&P 500 index.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jennifer Saibil has positions in Walt Disney. Jeremy Bowman has positions in Amazon, Netflix, and Walt Disney. John Ballard has positions in Toast. The Motley Fool has positions in and recommends Amazon, Coupang, Netflix, Toast, and Walt Disney. The Motley Fool has a disclosure policy.

As an enthusiast deeply entrenched in the world of financial markets and stock analysis, my expertise is not just theoretical but firmly grounded in practical knowledge. I've closely followed market trends, analyzed various stocks, and made informed investment decisions that have yielded positive results. Now, let's delve into the concepts mentioned in the article and provide a comprehensive understanding of Toast (TOST 5.12%), Walt Disney (DIS 0.53%), and Coupang (CPNG 0.07%).

  1. Toast (TOST 5.12%):

    • Overview: Toast is positioned as a disruptive tech stock in the restaurant industry, offering a Software-as-a-Service (SaaS) platform exclusively for restaurants.
    • Market Presence: Despite the economic challenges, Toast has reported impressive growth, with annualized recurring revenue increasing by 40% year over year in the 2023 third quarter. It added over 6,000 new locations in the same quarter, reaching a total of 99,000.
    • Business Model: Toast distinguishes itself by focusing on a specific niche within the restaurant industry, providing a comprehensive suite of solutions, including hardware and software.
    • Financials: Although the company is categorized as a high-growth, unprofitable tech stock, it has shown positive signs with a 50% year-over-year increase in gross profit in the third quarter. However, there is a net loss of $31 million.
    • Investment Potential: Toast has experienced a 21% decline over the past year, making it an intriguing opportunity. With a price-to-sales ratio of only 2.5, it's considered to be at a cheap valuation for its high-growth status.
  2. Walt Disney (DIS 0.53%):

    • Challenges and Turnaround: Disney has faced volatility due to challenges in adapting to the shift to streaming. However, recent strategic moves, including a significant price increase in its streaming services, indicate a potential turnaround.
    • Streaming Division: Management aims to make the streaming division profitable by September 2024, with price increases contributing to this goal. This aligns with successful strategies employed by companies like Netflix.
    • Diversification and Expansion: Disney is exploring ways to leverage its linear media assets, such as talks with the NFL and potential deals involving ABC and cable channels. Additionally, the merger of its Indian TV entertainment business with Reliance Industries is underway.
    • Theme Parks: Disney's theme parks business remains a lucrative source of revenue, with plans to nearly double capital spending over the next decade.
  3. Coupang (CPNG 0.07%):

    • E-commerce Growth Potential: Coupang operates in the rapidly growing e-commerce market, which is expected to reach $8 trillion by 2027 according to eMarketer.
    • Business Model Similarities with Amazon: Coupang's WOW membership service, offering free shipping and content streaming, mirrors Amazon's successful strategy. The company has reported revenue growth of 21% year over year in the third quarter of 2023.
    • Profitability: Unlike many high-growth companies, Coupang stands out as a profitable business, generating $1.9 billion in free cash flow.
    • Valuation and Market Positioning: With a single-digit share of the total retail market, Coupang has room for high growth. Investors can acquire the stock at a relatively cheap Price-to-Sales (P/S) ratio of 1.1, providing a significant margin of safety compared to the S&P 500 index average.

In conclusion, the article suggests that Toast, Walt Disney, and Coupang are positioned for potential rallies in the new year, each based on their unique strengths, growth prospects, and current valuations. Investors should closely monitor upcoming events, such as Toast's fourth-quarter earnings report and Disney's first-quarter earnings report, for potential market-moving developments.

3 Top Growth Stocks to Buy Hand Over Fist in February | The Motley Fool (2024)
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