Have you missed the rally of these 5 stocks in the past three years? Twilio(NYSE: TWLO), Wayfair (NYSE: W), Workday (NASDAQ: WDAY), Workiva (NYSE: WK), and Zendesk (NYSE: ZEN)? They have grown more than 100% since the beginning of 2017 despite posting operating losses consistently in the past three years. There is another link between them – they are all riding the Internet and Communications wave. This counter-intuitive stock performance has two implications. First, many investors might have stayed away and missed this rally on account of financial performance of these companies. Should they think of buying these stock now? Second, there is a chance that these stocks may be at a tipping point unless the financials start justifying rise in value recorded. If that’s the case, is it time for the existing investors to sell? Answering these two interesting questions for this unconventional, and possibly less identified, set of stocks could make for an interesting investment decision. So why not look at our dashboard Could These 5 Stocks Be Risky Or Hidden Gems – TWLO, W, WDAY, WK, ZEN and make an investment choice? We look at revenue, EPS, and net income trend in the context of stock price to understand whether risk or potential benefit has the upper hand.
Twilio enables communications by helping software developers add capabilities such as voice, video, and messaging. We observe significant stock price growth in 2018 and 2020 with some correlation with revenue growth. Covid-19 has acted as a catalyst for online communication and collaboration products, surging demand for Twilio’s platform. However, there is an inverse correlation with net income, with losses growing with increased investment in R&D and sales to ramp up revenue. The stock has already grown 10 times since 2017 and therefore, the expected pay off from investments and catalysts from Covid-19 could already be priced in. EPS improvement could be a key factor to look out for from an investment point of view.
Wayfair sells home furniture and goods online. It saw a very sharp jump in stock price in 2020 with Covid-19 acting as a catalyst. Furniture purchase is typically an offline activity but Covid-19 shutdowns have accelerated a shift to online. Even without this catalyst, Wayfair has grown its revenue consistently but its losses have increased, too. Covid-19 could accelerate revenue growth, resulting in operating leverage and reverse the unfavorable EPS trend this year.
Workday builds cloud-based ERP (enterprise resource planning) software. The company’s stock price has grown consistently, correlating with its revenue growth. However, while revenue continues to climb, the stock price growth has stalled in recent years. We further observe no correlation of stock price and EPS as losses have increased in the last 3 years. Cloud-based ERP is a well established industry which means that investors cannot forever be satisfied with top line growth alone, and EPS improvement may be necessary to unlock more value.
Zendesk is a CRM (customer relationship management) software company that has seen a consistent stock price growth along with revenue increase. However, there is an inverse correlation of stock price with net income and EPS. With many SAAS companies bleeding money, investors may start demanding a focus on profits. There is the potential to unlock value if the EPS trend reverses.
Workiva provides a cloud-based reporting compliance platform. The stock has continued to climb, in line with its revenue trajectory. Like Zendesk, there is no correlation of stock price with net income and EPS as the company has consistently posted losses. However, the silver lining is that losses have remained more or less capped despite the increase in revenue. There could be more value in the stock if the revenue trend holds and losses remain capped, implying better financial control.
Are these stocks too risky for you? Want to play safer? Then look at this set of 5 stocks that can offer you steady returns with limited risk. We also have a portfolio of low risk high fliers too. Check out these 5 S&P 500 stocks that could be outperformers.
Website of source