For anyone looking to beat average market returns, growth stocks are worth keeping an eye on. They aren’t as flashy as some big-name stocks. They don’t pay out income like the dividend kings either. They require research to dig up and even then you’ve got to tread very carefully to make sure you’re not overpaying for the hype. Still, I think it’s worth the hassle. Here are two I have my eye on today.
The US social media site Reddit (NYSE: RDDT) went public in March at $46 a share. I briefly considered the stock at the time but felt there were too many drawbacks.
The site hosted a user base that is notoriously difficult to monetise, especially compared to other social media sites. The company had never turned a profit despite being in operation since 2005. The price-to-sales ratio was around 15 or so. That’s not a typo. I don’t mean to write earnings. It really traded at 15 times sales.
And the icing on the cake was the exorbitant boardroom compensation. In 2023, the CFO pocketed $93m and the CEO $193m. Those are eye-watering pay packages compared to $800m revenue at a loss-making company.
Since that time, the share price has jumped to $141, nearly tripling in around eight months or so. The growth has certainly got me stroking my chin. Is it time to back this horse?
Well, the firm has had a very good year. Advertising revenue has grown. The use of AI to translate articles into other languages has helped grow its user base, too. Reddit also got a bump from loaning out its content to Google and OpenAI to train their AI models. All of which resulted in the firm’s first-ever profit.
While the transition to actually making money is helpful, I can’t ignore that the AI licensing is expected to be a temporary boost, not a permanent one. And if future numbers go back into the red then this will look costly indeed. I’ll avoid.
Dutch Bros
Another US stock to have taken my interest recently is coffee chain Dutch Bros (NYSE: BROS). The fast-growing chain went public in 2021, shot up like a rocket, then crashed 70%. The shares are up 126% since last September, however, so things seem to be going more smoothly now.
The obvious comparison here is with market leader Starbucks. Dutch Bros is still tiny. It has 900 outlets compared to Starbucks’ 17,000. Its market cap of $8bn is dwarfed by its bigger brother’s $117bn. That’s not to mention the many other players in the market. There’s a big slice of the pie on offer here.
The up-and-coming firm’s unique selling proposition is in its customer service. You aren’t served by baristas, but “broistas”. As you wait at the window (Dutch Bros operates drive throughs), expect lots and lots of small talk. Management likes to say they are in “the people business, not the coffee business”.
A forward price-to-earnings ratio of 107 is pretty extortionate, however. With the talk growing of a possible US recession in 2025, it’s too expensive for me to buy now. But I’ll be keeping it on my watch list in case a better entry point comes up.
