Hypergrowth stocks aren't every investor's cup of tea. Many investors aren't comfortable holding companies with stellar revenue growth but minimal or negative earnings.
Buying into such companies is an inherently risky strategy, with valuations based on pure growth prospects rather than proven bottom-line strength. Some are mirages, built on hype and unproven ideas. Wall Street is strewn with the remains of failed former market darlings that ran out of hypergrowth fuel and cash reserves before they had a solid long-term business going.
But if you're willing to stomach the volatility, the potential rewards of finding the next tech giant can be enormous. In the long run, compound returns from one or two big winners can make up for many swing-and-miss mistakes along the way. So if you can handle the heat, there's money to be made in the hypergrowth kitchen.
Let me show you a couple of hypergrowth tech stocks you should consider buying in 2024 and beyond. They don't mind racking up some bottom-line losses for a few more years, as long as the investment results in fantastic revenue growth.
Duolingo (NASDAQ: DUOL) is that app with the wide-eyed green owl that loves to remind you that you're skipping your Spanish practice. It won't make you fluent overnight, but its language-learning approach feels more like an exciting game than a tiresome chore. Stick with it long enough, and you'll eventually know how to order croissants in Paris or read street signs in Tokyo.
Rewards like gems, tournaments, and daily practice streaks can boost your motivation, and some of the practice passages are hilarious. The Ukrainian course really underscores the quality of local smetana (sour cream), while the Swedish one involves a lot of gnomes and the occasional flying moose. Again, Duolingo keeps the experience lighthearted to keep the learner engaged.
The company's marketing materials tap into the same silly energy. Leaning heavily into social media channels like TikTok and Facebook, Duolingo's ads feature the same characters you see in the learning experience, doing things most marketing divisions wouldn't touch with a ten-foot pole. Duo, the green owl mascot, can look downright threatening in his efforts to keep those streaks going.
And it's working. Duolingo's business is growing like a TikTok meme. In November's third-quarter report, daily active users (DAUs) increased 63% year over year, driving revenue 43% higher. Paid subscriptions to Duolingo's premium services are growing almost as fast as the ad-supported user base, and the company turned a small bottom-line profit in the third quarter.
That's still just the start of a long-term growth story. Besides adding more language pairs over time, Duolingo recently introduced math and music courses, in the same format as any language class. In the long run, co-founder and CEO Luis von Ahn wants to cover many more subjects.
"Our belief is that there are things that make a lot of sense to learn with the Duolingo app. They are usually things that you can learn on your own that take a long time to learn, where the thing that you're learning requires a lot of repetition," he said on the third-quarter earnings call. "Things that require a lot of repetition, that take a long time to learn, and also that we think will have a very large audience. These are the types of things that we will be adding to the app, although for the time being, we're going to stay just with math and music."
So that's a strategy for the long haul, allowing the company to double down on languages for now, with a sprinkle of math and music efforts. But come back in five or 10 years, and I think you'll see a full-fledged digital educator with courses like history, physics, and underwater basket weaving.
The sky is the limit and Duolingo is just getting started. Its playful learning format and quirky social-media marketing make it stand out in the crowded online education space. That kind of user engagement fuels growth. If the gamified learning system continues to win users and expand into new subjects, this stock could have a serious runway.
Next, let's take a quick look at Confluent (NASDAQ: CFLT).
This company acts as a universal translator for the messy world of big data. Companies use tons of different software systems that each have their own "language" for storing and handling various data types. Confluent provides a common platform where all that data can flow and communicate clearly, no matter where it came from.
The Confluent Cloud platform is a commercial-grade version of the open-source Apache Kafka data-streaming system, with the complicated back end separated from the client by a fully managed cloud-based service. Confluent manages the hardware, security, and on-the-fly configuration, leaving customers with a clean and low-effort experience. Setting up a similar environment in a corporate data center can certainly be done with Kafka, but Confluent makes it easy for a fee.
Right now, Confluent taps into the artificial intelligence (AI) frenzy in a big way. On the fourth-quarter earnings call earlier this month, CEO Jay Kreps explained that generative AI builders love the quick and easy experience of using Confluence's data pipelines.
"We continue to see demand from customers who are building the next wave of generative AI applications, including AI-powered procurement software, chatbots, coding platforms, and even unexpected use cases like predicting and detecting cavities," Kreps said. "These organizations turn to Confluent to quickly build and scale GenAI applications that connect their proprietary systems to LLMs [large language models]... We believe this represents a tremendous opportunity for Confluent as customers evolve from experimentation in the short term to production in the medium and long term."
Imagine self-driving cars using Confluent to process real-time sensor data, or customer-service chatbots that continuously refine their responses based on ever-evolving user interactions. Could it be done with something like Kafka or a simpler pile of unprocessed data? Sure, but those systems would almost certainly run slower, take longer to develop, and require more human hand-holding along the way.
Confluent is a pretty direct investment in the generative AI space, as it has an active partnership with ChatGPT developer OpenAI.
Like Duolingo, Confluent is largely unprofitable but its top-line sales are skyrocketing. In fiscal year 2023, revenue rose by 33% but sales of the Confluent Cloud flagship service clocked in at a 65% gain.
I see big futures ahead of both companies, and expect generous long-term returns from their stocks -- even from today's not-cheap starting levels.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Anders Bylund has positions in Duolingo. The Motley Fool has positions in and recommends Confluent, Duolingo, and Meta Platforms. The Motley Fool has a disclosure policy.
2 Hypergrowth Stocks to Buy in 2024 and Beyond was originally published by The Motley Fool
