With the financial sector reeling under the pressure of recent bank insolvencies, the Federal Reserve is expected to announce a smaller rate hike next week. However, as inflation remains elevated and the jobs market remains strong, the Fed is soon expected to return to higher rate hikes.
Although the stock market is expected to remain under pressure this year, investing in best-in-class growth stocks Salesforce, Inc. (CRM), Extreme Networks, Inc. (EXTR), and Cars.com Inc. (CARS) could be wise.
Before discussing what could help these growth stocks dodge the economic challenges and deliver solid returns, let’s see what’s currently affecting investor sentiment.
Earlier this week, February’s inflation report came out with the consumer price index (CPI) rising 0.4% for the month and 6% year-over-year, in line with market expectations. This marked the slowest annual increase in consumer prices since September 2021. However, the monthly core inflation increased higher than estimated.
Along with the elevated inflation, the jobs market continues to remain strong. Nonfarm payrolls rose by 311,000 in February, higher than the 225,000 analysts’ estimates. This spate of strong macroeconomic data is expected to keep the Federal Reserve on track to achieve its 2% inflation target by raising interest rates aggressively.
Before the collapse of the Silicon Valley Bank last week, the Street was expecting a 50-basis-point rate increase. However, it is widely expected that the Fed will go ahead with a smaller rate increase next week to restore stability to the financial markets.
While the economic uncertainty is expected to keep the stock market under pressure, some growth stocks have the potential to survive the challenges and emerge as winners in the long run.
Investors' interest in growth stocks is evident from the Vanguard Growth ETF’s (VUG) 9.5% returns year-to-date. Here is why CRM, EXTR, and CARS are well-positioned to deliver market-beating returns.
Salesforce, Inc. (CRM)
CRM is a customer relationship management technology provider. The company’s Customer 360 platform enables its customers to work together to deliver connected experiences.
On January 12, 2023, Walmart Commerce Technologies announced its partnership with CRM to provide retailers with technologies and services that power frictionless local pickup and delivery for shoppers everywhere. CRM’s Executive VP, Alliances & Channels, Tyler Prince, said, “Salesforce is thrilled to partner with Walmart as it transforms its business and further expands into the digital technology market.”
“Through this partnership with Salesforce, Walmart can grow its business in new ways by productizing its proven retail processes – empowering other retailers to create new and personalized experiences for their customers,” he added.
CRM’s revenue grew at a CAGR of 22.4% over the past three years. Its net income grew at a CAGR of 18.2% over the past three years. In addition, its EBIT grew at a CAGR of 58.9% in the same time frame.
CRM’s 73.34% trailing-12-month gross profit margin is 49.8% higher than the 48.97% industry average. Likewise, its 17.34% trailing-12-month EBITDA margin is 54.6% higher than the 11.22% industry average. Furthermore, the stock’s 32.60% trailing-12-month levered FCF margin is 394.9% higher than the 6.59% industry average.
CRM’s total revenue for the fourth quarter ended January 31, 2023, increased 14.4% year-over-year to $8.38 billion. Its non-GAAP income from operations rose 123.3% year-over-year to $2.45 billion. The company’s non-GAAP net income increased 96.4% year-over-year to $1.66 billion. In addition, its non-GAAP EPS came in at $1.68, representing an increase of 100% year-over-year.
Analysts expect CRM’s EPS and revenue for the quarter ending April 30, 2023, to increase 64.5% and 10.2% year-over-year to $1.61 and $8.17 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters. The stock has gained 38% year-to-date to close the last trading session at $182.91.
CRM’s POWR Ratings reflect its solid prospects. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Growth and Sentiment and a B for Quality. CRM is ranked #19 out of 134 stocks in the Software – Application industry. Click here to see the other ratings of CRM for Value, Momentum, and Stability.
Extreme Networks, Inc. (EXTR)
EXTR provides software-driven networking solutions worldwide. It designs, develops, and manufactures wired and wireless network infrastructure equipment; and develops software for network management, policy, analytics, security, and access controls.
EXTR’s revenue grew at a CAGR of 8.9% over the past five years. Its EBITDA grew at a CAGR of 34.5% over the past three years.
In terms of the trailing-12-month gross profit margin, EXTR’s 56.28% is 14.9% higher than the 48.97% industry average. Its 4.13% trailing-12-month net income margin is 41.7% higher than the 2.92% industry average. Likewise, its 1.14x trailing-12-month asset turnover ratio is 88.3% higher than the industry average of 0.60x.
For the fiscal second quarter ended December 31, 2022, EXTR’s total net revenues increased 13.3% year-over-year to $318.35 million. The company’s non-GAAP operating income rose 28.9% over the prior-year quarter to $47.34 million. Its non-GAAP net income increased 28.3% year-over-year to $36.48 billion. Moreover, its non-GAAP EPS came in at $0.27, representing an increase of 28.6% year-over-year.
Analysts expect EXTR’s EPS and revenue for the quarter ending March 31, 2023, to increase 23.1% and 11.9% year-over-year to $0.26 and $319.47 million, respectively. It has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 81.8% to close the last trading session at $16.98.
EXTR’s POWR Ratings reflect solid prospects. It has an overall rating of A, which translates to Strong Buy in our proprietary rating system.
It has an A grade for Growth and Quality and a B for Momentum. Within the B-rated Technology - Communication/Networking industry, it is ranked #2 out of 50 stocks. To see the other ratings of EXTR for Value, Stability, and Sentiment, click here.
Cars.com Inc. (CARS)
CARS operates as a digital marketplace and provides solutions for the automotive industry. Its platform connects car shoppers with sellers. The company showcases dealer inventory, elevates and amplifies dealers’ and automotive manufacturers’ brands, connects sellers with the ready-to-buy audience, and empowers shoppers with the resources and information needed to make car-buying decisions.
CARS’ EBITDA grew at a CAGR of 12.6% over the past three years. Its levered FCF grew at a CAGR of 16.8% over the past three years. In addition, its EBIT grew at a CAGR of 63.5% in the same time frame.
CARS’ 68.81% trailing-12-month gross profit margin is 38.6% higher than the 49.63% industry average. Likewise, its 24.73% trailing-12-month EBITDA margin is 31.7% higher than the 18.78% industry average. Furthermore, the stock’s 18.32% trailing-12-month levered FCF margin is 140.7% higher than the 7.61% industry average.
CARS’ total revenue increased 6.3% year-over-year to $168.20 million for the fourth quarter ended December 31, 2022. Its adjusted EBITDA increased 5.8% year-over-year to $49.52 million.
The company’s free cash flow rose 55.9% over the prior-year period to $31.91 million. Its net income came in at $10.26 million, compared to a net loss of $2.88 million in the year-ago period. In addition, its EPS came in at $0.15, compared to a loss per share of $0.04 in the prior-year quarter.
Analysts expect CARS’ revenue for the quarter ending March 31, 2023, to increase 5.5% year-over-year to $166.91 million. Its EPS for the quarter ending June 30, 2023, is expected to increase 14.2% year-over-year to $0.47. Over the past nine months, the stock has gained 73.2% to close the last trading session at $16.47.
CARS’ POWR Ratings reflect this positive outlook. CARS has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Growth. CARS is ranked #5 out of 21 stocks in the Auto Dealers & Rentals industry. Click here to see the additional ratings of CARS for Value, Momentum, Stability, Sentiment, and Quality.
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CRM shares fell $0.20 (-0.11%) in premarket trading Thursday. Year-to-date, CRM has gained 38.10%, versus a 1.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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