Growth stocks are companies that are still in the process of evolving, which means there is plenty of room for expansion. However, not all growth stocks are capable of producing significant returns. Only a few companies that are part of rapidly growing, innovative industries have the potential to outperform the market in the long run. Plus, hypergrowth stocks also carry risks - and, as such, they're better suited for investors with a strong risk appetite.
Here are two top growth stocks trading for less than $40 per share that are focused on expanding their businesses and improving their fundamentals as the artificial intelligence (AI) era progresses.
Growth Stock No. 1: UiPath
The first growth stock is global software company UiPath (PATH), which trades at around $23 per share. UiPath, founded in 2005, is a leading robotic process automation (RPA) software platform that allows organizations to automate repetitive tasks through the use of software robots, or "bots."
With the dawn of the AI era, UiPath reported outstanding quarterly results last year, driving a gain of 95% in its stock during 2023 - and significantly outperforming the S&P 500 Index's ($SPX) 25% gain. So far in 2024, the stock is down 5%. The company is set to release its fourth-quarter and full-year fiscal 2024 results on March 13. Let's see if the stock is a buy ahead of earnings.
The use of software robots to automate tasks allows organizations to reduce manual errors and increase productivity. This has resulted in increased demand for UiPath's products, with annual recurring revenue (ARR) rising 24% to $1.4 billion in the third quarter of fiscal 2024. Total revenue increased by 24% year-over-year during the quarter to reach $326 million. While the company is not yet profitable, analysts predict a profit of $0.47 for fiscal year 2024.
To take advantage of AI in robotics, the company has now launched UiPath Autopilot. UiPath has the financial resources to continue investing in AI projects that will help it turn a profit. It ended the third quarter with a strong balance sheet, including $1.8 billion in cash, cash equivalents, and marketable securities. It also generated $44 million in adjusted free cash flow in the third quarter.
Management expects the company's revenue to increase by 23% to 25% in Q4, totaling $381 million to $386 million. Additionally, ARR could be around $1.45 billion.
Looking ahead, analysts predict that UiPath's revenue and earnings will grow by 18.8% and 9.9%, respectively, in fiscal 2025.
The general perception of RPA is that it will eliminate jobs because it automates repetitive tasks faster and with fewer errors. However, I believe it can free up time for people to work on more strategic and creative projects.
According to a recent Gartner market study, UiPath currently has a 36% share of the global RPA market, which is projected to grow at a CAGR of 39.9% through 2030. This implies that UiPath has numerous expansion opportunities.
Overall, UiPath stock is a “moderate buy” on Wall Street. Out of the 18 analysts that cover the stock, six rate it a “strong buy,” one recommends a “moderate buy,” and 11 rate it a “hold.” UiPath stock has already surpassed its average target price of $23.21. Its high target price of $28, however, indicates a potential upside of 18.5% over the next 12 months.
Growth Stock No. 2: Confluent
The second growth stock in my list is data streaming provider Confluent (CFLT), trading now around $32 per share. Co-founded in 2014 by the creators of Apache Kafka, Confluent is a leading provider of streaming platforms and data analytics solutions. The Confluent platform extends Apache Kafka's capabilities by providing seamless data integration and real-time analytics to help organizations make informed decisions.
Its recently reported fourth-quarter results were strong, and have helped to boost its stock price by 42% year-to-date, compared to a 7.2% increase in the S&P 500. However, CFLT is down about 19% from its 52-week high, making now a good time to buy this excellent growth stock.
The high demand for its platform resulted in 1,229 customers with ARRs of $100,000 or more, a 21% increase over the prior-year quarter. The efficiency of its platform is also attracting new high-value customers. Management highlighted that both existing and new customers led to a growth of 36% in subscription revenue in fiscal 2023.
Confluent's revenue is growing rapidly. To be more precise, revenue increased from $149 million to $777 million between fiscal 2019 and fiscal 2023. Revenue increased by an impressive 33% in fiscal 2023. Though the company has not yet achieved sustained profitability, the fourth quarter yielded its first adjusted net profit of $0.04 per share.
Driven by a strong end to fiscal 2023, management expects fiscal 2024 to be breakeven for adjusted operating margin and free cash flow margin.
For the first quarter of 2024, management expects revenue in the $211 million to $212 million range, with a high probability of another profitable quarter. For the full year, management expects revenue to grow by 22.3% to $900 million. Adjusted earnings could reach $0.17 per share, up from $0.04 in 2024.
With the growing reliance on real-time data integration and analysis, Confluent's already successful platform is well-positioned to capitalize on this opportunity. Analysts predict that Confluent's revenue will rise by 22.3% in fiscal 2024, followed by 25.1% in fiscal 2025.
Following the results, Mizuho increased its target price for Confluent stock to $38 from $34 with a “buy” rating. The analyst believes that data streaming has the potential to grow significantly in the coming years, and Confluent offers the best platform.
Overall, Confluent stock is a “moderate buy” on Wall Street. Out of the 28 analysts that cover the stock, 17 rate it a “strong buy,” two recommend a “moderate buy,” eight rate it a “hold,” and one suggests a “moderate sell.” Confluent stock trades above its average target price of $31.92, but its high target price of $40 indicates a potential upside of 20.2% over the next 12 months.
The Bottom Line on PATH and CFLT Stocks
While neither company is profitable yet, their revenue is rapidly increasing. Profitability is within reach, thanks to AI and the rising demand for their products.
Both UiPath and Confluent are currently trading around 8 times forward 2025 sales, which seems like a good bargain for hypergrowth stocks with exceptional long-term potential in AI. I believe both UiPath and Confluent can generate significant returns in the coming years.
On the date of publication, Sushree Mohanty 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.
