In the dynamic landscape of the stock market, growth stocks have consistently stood out as vehicles for potential wealth creation. These stocks, known for their above-average growth compared to well-established legacy enterprises, are characterized by their tendency to reinvest earnings rather than pay dividends. As such, growth stocks hold the allure of significant capital appreciation.
However, 2023 posed unique challenges for growth stocks. Against a backdrop of soaring interest rates and surging bond yields, the appeal of many debt-fueled growth stocks dimmed, particularly as investors found higher returns elsewhere.
But an improving fundamental backdrop in 2024, including a highly anticipated Fed pivot, could give growth stocks a boost. Here's a look at two compelling growth stocks that could be poised for significant upside in the next year - and how investors can add exposure to both for just $1,000 right now.
AppLovin
AppLovin (APP) is a prominent company in the mobile app industry, known for providing a range of services to app developers, including marketing, monetization, and analytics through platforms such as MAX, AppDiscovery, and SparkLabs. The company also operates Lion Studios, which collaborates with game developers for the promotion and publication of mobile games. AppLovin has made significant strides in its sector, marked by a series of acquisitions and investments in various mobile game studios, such as PeopleFun, Firecraft Studios, and Belka Games, enhancing its portfolio and market presence.
The company has continued to expand its reach and capabilities through strategic acquisitions, including the mobile monetization company MoPub from Twitter for $1.1 billion and the mobile app measurement company Adjust. These acquisitions reflect AppLovin's commitment to providing comprehensive solutions for app developers and its ambition to lead in the mobile app industry.
Moreover, AppLovin's advancements in AI technology for its mobile user acquisition platform, AppDiscovery, have significantly enhanced the efficiency and effectiveness of mobile ad campaigns. These improvements aim to provide a better return on ad spend, increased accuracy, and agility in campaigns.
AppLovin was valued at approximately $24 billion at the time of its 2021 IPO, and now carries a market cap of $13.68 billion. APP gained roughly 278% during 2023, absolutely crushing the performance of the broader equities market.
In its latest financial results, AppLovin reported an impressive Q3 2023 performance. The tech company's revenue surged to $864.3 million, marking a solid 21% year-over-year growth. Notably, operating expenses rose 15% to $412.7 million, but the standout figure in the report was a monumental rise in net income, soaring to $108.6 million - a staggering 357% increase compared to the previous year.
Looking ahead, analysts are targeting 79.5% EPS growth in fiscal 2024 to $1.58 per share, accompanied by 16.3% revenue growth to $3.79 billion.
Currently, Wall Street considers APP a “Moderate Buy,” based on ratings from 15 analysts. The stock has 10 “Strong Buys,” 4 “Holds,” and 1 “Strong Sell" rating. The mean price target is $51.46, implying expected upside of 29% over the next 12 months.
Incyte Corporation
Incyte Corporation (INCY), a Wilmington, Delaware-based biopharmaceutical company, specializes in developing therapeutics in hematology, oncology, and inflammation/autoimmunity. Its prominent products include JAKAFI for myelofibrosis and PEMAZYRE, a kinase inhibitor. The company, founded in 1991, has significant operations in the U.S., Europe, and Japan.
In 2023, Incyte's stock value dropped nearly 22% as the company faced multiple challenges, including increased competition and pipeline setbacks. The competition intensified with the FDA approval of GSK plc's (GSK) Ojjaara, a rival to Incyte's Jakafi. Separately, the FDA rejected INCY's ruxolitinib extended-release tablets and halted the LIMBER-304 trial, negatively impacting the company's stock.
Despite these issues, Incyte reported growth in Jakafi sales and progress with its Opzelura cream in the U.S. The FDA's approval of Zynyz for cancer treatment marks a step in diversifying the company's portfolio.
On the earnings front, Incyte Corporation reported a notable increase in revenue and net income for the quarter ending September 2023. The company’s revenue rose to $919.03 million, an 11.63% increase from the previous year. Net income jumped 51.87% to $171.27 million, while adjusted earnings per share checked in at $1.10.
Net profit margin increased to 18.64%, up 36.06% from the previous year. However, the company experienced a decline in its cash flow from operations, which decreased by 50.12% to $147.84 million. Free cash flow also fell, down 37.63% to $154.20 million.
That said, Incyte's balance sheet remained strong, with total assets increasing 15.93% year-over-year to $6.39 billion, while total liabilities grew 13.50% to $1.46 billion. The company's liquidity position is robust, with cash and short-term investments totaling $3.52 billion, an 18.12% increase. Despite the challenges in cash flow, Incyte’s quarterly results demonstrate substantial growth in revenue and profitability, underlining its financial resilience.
Analysts project significant growth for Incyte in upcoming quarters, with EPS expected to rise 28% in fiscal 2024 to $3.84, while revenue ramps up 12% to $4.13 billion.
The consensus rating on the stock is a “Moderate Buy,” based on 18 analysts in coverage. The ratings are evenly split between 9 “Strong Buys” and 9 “Holds.”
INCY's average 12-month price target is $76.06, implying expected upside of more than 21% over the next year.
Investment Strategy
For investors looking to invest $1,000 in this pair of growth stocks, a balanced approach considering both growth potential and risk management would be prudent:
- Higher Allocation to AppLovin (APP): Given its exceptional performance, strong financials, and positive outlook, a larger portion of your investment could be allocated to APP. For example, investing 60-70% of your $1,000 in APP could capitalize on its growth momentum.
- Moderate Allocation to Incyte Corporation (INCY): Despite its challenges, and the greater volatility inherent to biotechs, Incyte has potential in its product pipeline and financial health. Allocating 30-40% of your investment to INCY can provide diversification and potential upside if the company overcomes its current challenges.
Proposed Division
AppLovin (APP): $600 - $700
Incyte Corporation (INCY): $300 - $400
This division aims to balance the high growth and innovative potential of AppLovin, with the more stable but fundamentally challenging position of Incyte. It's important to remember that stock market investments are subject to risk, and it's advisable to continually review and adjust your portfolio based on ongoing market conditions and company performances.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
