A key to earning higher returns in the stock market is to carefully select stocks of growing companies with strong fundamentals. Growth stocks often belong to innovative or rapidly expanding industries such as cannabis, biotech, energy, or the technology sector. As these industries grow, the leading companies will be able to gain a significant market share, driving up their stock prices.
Furthermore, since the beginning of the artificial intelligence (AI) era, many technology companies have experienced explosive growth. This trend is likely to continue as the AI era progresses.
The critical factor is to hold these growth stocks for the long term, and let compounding work its magic. We have two such growth stocks here, which Wall Street believes will thrive over time.
Growth Stock No. 1: Qualcomm Incorporated
Qualcomm Incorporated (QCOM) is a global semiconductor and telecommunications equipment company that has emerged as a key player in the wireless technology industry. Known for its innovation in 3G, 4G, and 5G technologies with its Snapdragon processors, Qualcomm has attracted significant interest from the analyst community.
Valued at $213.8 billion, QCOM stock has gained 32.4% year-to-date, compared to the Nasdaq Composite's ($NASX) gain of 19%.
Qualcomm faced significant challenges in fiscal 2023 due to inflationary pressures that limited consumer spending on electronics. However, fiscal 2024 has been good so far.
In the second quarter of fiscal 2024, total revenue increased by 1% year on year to $9.38 billion. Adjusted net earnings per share increased by an impressive 14% to $2.44.
Qualcomm operates in two business segments. Notably, QCT (Qualcomm CDMA Technologies) includes handsets, automotive, and the IoT (Internet of Things) chips business, which increased 1% year on year in Q2. Meanwhile, QTL's (Qualcomm Technology Licensing) business grew 2%.
According to Canalys, the global smartphone market grew 12% year on year in the second quarter. Thanks to generative AI, the global smartphone market recovery could help boost Qualcomm's handset chip sales in the future, which increased only 1% in the quarter. Meanwhile, automotive chip sales increased by 35%, while IoT chip sales fell 11% year on year.
Furthermore, the company has integrated generative AI features into its products with the release of the Snapdragon 8 Gen 3 processor for smartphones. It recently partnered with Samsung, whose Galaxy phones will be powered by the Snapdragon 8 Generation 3.
Qualcomm also pays a dividend, with a forward yield of 1.7%, compared to the technology sector's average of 1.3%. Furthermore, its forward dividend payout ratio of 29.9% is low, implying that dividends could grow. The company has increased its dividend for the last 22 years.
Cristiano Amon, President, and CEO, stated, “We are excited about our continued growth and diversification, including achieving our third consecutive quarter of record QCT Automotive revenues, upcoming launches with our Snapdragon X platforms, and enabling leading on-device AI capabilities across multiple product categories.”
In fiscal 2024, analysts expect a 6.8% increase in revenue to $38.3 billion, with earnings increasing by 17.7% to $9.93 per share. Furthermore, revenue and earnings are expected to increase by 10.3% and 13.6%, respectively, in fiscal 2025.
Trading at 19.3x forward 2024 earnings, which is lower than its five-year historical price-to-earnings average ratio of 23, Qualcomm appears to be an attractive AI growth stock to buy now.
Overall, for QCOM, analysts have an average rating of “moderate buy.” The stock is trading 5% below its mean target price of $201.45. However, its high target price of $270 implies an upside potential of 41% over the next 12 months.
Out of 29 analysts covering the stock, 17 have a “strong buy” rating, one has a “moderate buy,” 10 rate it a “hold,” and one rates it a “strong sell.”
Growth Stock No.2: Duolingo
Duolingo (DUOL) is a top provider of language learning apps and educational technology. It provides a gamified, user-friendly platform for language learning through mobile and web applications.
Founded in 2012, Duolingo has grown exponentially, attracting a large and diverse user base. Duolingo offers courses in more than 40 languages, and its app has millions of active users worldwide.
Valued at $233.9 million, the stock is down 15.6%, compared to the S&P 500’s ($SPX) gain of 17.8%.
Duolingo's free and easy-to-use platform continues to attract new users. The company's emphasis on user engagement and retention contributes to a loyal user base. However, it has also successfully monetized its platform through a subscription service (Duolingo Plus), which provides an ad-free experience and additional features. Advertising and certification fees from the Duolingo English Test also help to generate revenue.
The company began 2024 on a high note, with a 41% increase in total bookings to $197.5 million. It reported over 97.6 million monthly active users in the quarter, with paid subscribers increasing by 54%. This growth is fueled by Duolingo's continuous innovation and expansion into new markets.
In addition, the company reported a net income of $27 million, up from a net loss of $2.6 million in the year-ago quarter.
Duolingo's growing user base, effective monetization strategies, and global reach position it for rapid expansion in the coming years. Analysts expect revenue to increase by 38.1% for the full year 2024. Furthermore, analysts expect the company to report a profit of $1.68 per share, up from $ 0.35 per share in 2023. In fiscal 2025, revenue and earnings are expected to increase by 28.2% and 58.7%, respectively.
Overall, analysts have an average rating of “moderate buy” for DUOL. Based on its mean target price of $246.54, the stock has an upside potential of 38% from current levels. Plus, its high target price of $275 implies an upside potential of 54% over the next 12 months.
Out of 14 analysts covering the stock, seven have a “strong buy” rating, one has a ”moderate buy,” five have a “hold” rating, and one rates it a “strong sell.”
