The 4 Highest Growth Tech Stocks on the Market Today – Motley Fool

The tech sector hosts plenty of growth stocks, but it can be tough to identify the highest growth companies as the economic fallout from the COVID-19 pandemic ravages markets worldwide. To narrow down the list, I recently pulled together an analysis that focused on stocks with rosy near-term revenue forecasts, while excluding companies that made big acquisitions, faced easy year-over-year comparisons, or had market caps under $5 billion.

Four companies that met these specific criteria are: Zoom Video Communications (NASDAQ:ZM), GSX Techedu (NYSE:GSX), GDS Holdings (NASDAQ:GDS), and Crowdstrike (NASDAQ:CRWD). Let’s see if any of these high-growth stocks are worth buying.

Image source: Getty Images.

These four companies share common strengths

Zoom’s platform enables large groups of people to hold online video conferences. GSX Techedu hosts an online education platform for remote learning in China, GDS Holdings develops and operates Chinese data centers, and Crowdstrike offers cloud-based cybersecurity services.

These business models are all well-insulated from the pandemic because they benefit from the rising usage of remote work services, online education tools, cloud services, games, and streaming media services. That’s why analysts expect all four companies to generate robust revenue growth over the next two years:

YOY = Year-over-year. Source: Yahoo Finance, April 30.

But all four companies face unique challenges

Those forecasts are impressive, but all four companies face near-term headwinds. Zoom expanded from 10 million daily active users to over 200 million in the first three months of 2020, but it’s been struggling with security issues as big competitors — including Cisco‘s Webex and Facebook‘s Messenger Rooms — close in.

GSX’s total enrollments surged 258% to 2.74 million last year, but it was recently hit by troubling fraud allegations from short sellers Grizzly Research and Citron Research. Both firms claim GSX inflated its revenue and enrollment numbers.

GDS is still building plenty of data centers for growing Chinese cloud providers like Alibaba and Tencent, but the COVID-19 crisis in China temporarily slowed its construction and move-in rates. Crowdstrike, which recently started securing Zoom’s platform, more than doubled its number of new subscribers annually last quarter, but it still faces tough competition from other cybersecurity companies.

Zoom and GSX are both profitable on a GAAP basis, but GDS and Crowdstrike both posted wider GAAP losses last year. On a non-GAAP basis, which excludes stock-based compensation and other one-time expenses, GDS posted a profit last year as Crowdstrike’s net loss narrowed.

All four stocks are richly valued

Zoom, GSX, GDS, and Crowdstrike all easily outperformed the S&P 500‘s 9% dip this year, but investors clearly favored Zoom and GSX over the other two stocks.

Source: YCharts

However, all four stocks are now richly valued relative to their annual revenues:

Source: Yahoo Finance, April 30. *RMB terms.

GSX looks the cheapest relative to its revenue growth, but the fraud allegations will likely cap its gains until it presents clearer answers. Investors might also be waiting for GDS to generate consistent profits before buying the stock.

Zoom and Crowdstrike are tough to recommend at these levels, especially when companies with slower growth but more stable business models are trading at lower valuations.

Salesforce (NYSE:CRM), for example, is expected to grow its revenue and adjusted earnings by 20% and 25%, respectively, next year. Yet the company, which leads the growing cloud-based CRM (customer relationship management) market, trades at just 5.5 times next year’s revenue and less than 50 times forward earnings.

Do your due diligence and recognize the risks

Zoom, GSX, GDS, and Crowdstrike might outperform the market in the near-term as investors flock to stocks shielded from the COVID-19 pandemic. But that enthusiasm could wane after the pandemic passes, and fundamental flaws and high valuations could halt their year-long rallies.

Out of these four stocks, GDS and Crowdstrike are more appealing than Zoom and GSX, which will both face tougher scrutiny and competition in the near future. However, investors should realize that these growth stocks are all risky plays, and they should do their due diligence before buying any shares.