2024’s been a fantastic year for my Stocks and Shares ISA. Thanks to some prudent stock picking throughout 2022 and 2023, it’s grown just shy of 40% since January. And while valuations are once again starting to look a bit rich, I’ve still been steadily drip feeding capital into the stock market throughout the year.
Some of this money went to brand new positions in companies like Axon Enterprise, CrowdStrike and, most recently, Toast. But the bulk of it was allocated to businesses I already own and love. As such, my five largest investments this year were in Shopify (NYSE:SHOP), Arista Networks, Intuitive Surgical, Mercadolibre, and Veeva Systems.
Investing in US growth
Sadly, high-quality growth rarely goes ignored. So it doesn’t take more than a quick glance at these businesses to realise none of the stocks are trading at a cheap valuation – at least not since 2022. As such, volatility’s often the price of entry when investing in US growth stocks.
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However, while there are a lot of valuations that don’t make much sense, these businesses are priced high on the back of largely reasonable expectations. Take Shopify as an example. The e-commerce platform has transformed itself into a cash-generating machine, delivering consistent profitability and ever-widening free cash flow margins.
Since the start of 2024, gross merchandise volume (GMV) moving through its platform has landed just shy of $200bn versus around $160bn a year ago – a 25% jump. GMV’s currently running with a lot of momentum, with September marking the fifth consecutive quarter of more than 20% growth.
This has subsequently translated into a 26% revenue expansion that’s been accelerating since January. And when pairing this with operating margins expanding from 7.1% to 13.1% in the space of a year, it’s not hard to understand why the stock’s outperformed in 2024, climbing by almost 60% year-to-date.
Accelerating growth obviously won’t last forever. But if profit margins continue to rise and meet the mature industry average of 24%, today’s valuation, while still rich, isn’t completely ludicrous, in my opinion.
Balance risk with reward
Even if Shopify’s valuation can be justified, it’s still based on margin expansion expectations. As usual, there are no guarantees that management will succeed in its long-term strategy. Competition from the likes of Amazon’s certainly giving Shopify a run for its money. On the merchant services side of the business, it has to compete with some pretty powerful rivals like Salesforce.
To tackle this, the firm deliberately targets mid-market-sized firms. After all, 10 years from now, these could grow into enterprise-scale customers already locked into Shopify’s ecosystem.
It’s a nice, forward-thinking strategy. However, it’s also reliant on these customers sticking around and not switching to competitors if Shopify’s technology fails to meet enterprise customer needs.
It’s a similar story to the other growth stocks I’ve been buying this year. Each trade at a valuation that’s built on expectations of future performance, which may not come to pass if they can’t overcome the threats lurking around their businesses.
Nevertheless, their impressive track records make me cautiously optimistic about their long-term potential, even at today’s prices. That’s why I think investors with a tolerance for volatility should consider taking a closer look.
