The S&P 500 is up 81% over the last five years and is sitting at an all-time high as of this writing. In short, it's hard to find quality growth stocks that aren't hitting new highs along with the market. If a stock is down, there's probably a reason.
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There are reasons why growth stocks such as Five Below (NASDAQ: FIVE), The Trade Desk (NASDAQ: TTD), and e.l.f. Beauty (NYSE: ELF) are down instead of up. But there's also reason to believe that all three can push past the things that investors are worried about.
1. Five Below
No one should question whether Five Below can grow revenue -- it can. Through the first three quarters of its fiscal 2024 -- the nine months ended Nov. 2 -- the company's net sales were up 12% from the comparable period of fiscal 2023. This growth is thanks to the 205 new stores that it's opened year to date. It has over 1,700 locations now, and management has said that it expects to open roughly 1,800 more by 2030. This is clearly a growth stock.
More questionable is whether Five Below can deliver attractive financial results in a changing economic landscape. The company made its mark by selling items at $5 or cheaper, which is increasingly difficult as inflation continues to be an issue. Moreover, 40% of its products in fiscal 2023 were sourced from international vendors, which could pose a problem with escalating trade tensions.
The thing is, I believe the stock price for Five Below already reflects the challenges. Management believes it will report full-year earnings per share (EPS) of $4.34 to $4.52, which means it trades at about 20 times those earnings estimates. That's inexpensive for a business growing at a double-digit rate.
Five Below also has a strong balance sheet that's ready to endure the challenges. It has over $200 million in cash, cash equivalents, and short-term investments, and it doesn't have any debt. In short, if it needs to adjust, it has the means to do so. And because of this, it seems likely to me that the company will figure out how to keep its business optimized for long-term profits, which will help the stock recover in due time from its greater-than-50% drop from 52-week highs.
2. The Trade Desk
The Trade Desk just did something unprecedented: It underperformed its own financial guidance. For the fourth quarter of 2024, management had guided for revenue of at least $756 million. But it only generated Q4 revenue of $741 million. And due to this earnings miss, the stock is now down more than 40% from its high -- its fourth largest pullback since it went public almost nine years ago.
It seems that founder and CEO Jeff Green takes the blemish on his perfect track record personally. In the earnings call with analysts, Green said, "We did the largest reorganization in company history in December," in an effort to boost the company's growth at its larger scale.
Taking a step back, Green and his team have an exceptional track record in growing the business in spite of a digital advertising space characterized by a few massive competitors. If this team were to start a new company today, investors would have no trouble believing it was destined for greatness. In the same way, I think that investors should take it seriously when Green says they've reorganized The Trade Desk so that it can scale bigger and faster than ever.
According to The Trade Desk, its addressable market is worth about $1 trillion compared with the meager $12 billion on its platform today. This points to an attractive growth opportunity. Granted, its Q4 revenue growth rate dropped to 22% and it's forecasting just a 17% growth rate for the upcoming first quarter. But given its track record, I believe management will accelerate its growth rate yet again if given a little time.
The Trade Desk stock is down for one bad quarter despite eight years of good reports. In short, its consistently excellent past results are reason to still believe in the business and reason to regard Q4 as just a short-term anomaly.
3. E.l.f. Beauty
Finally, some might quibble with me about e.l.f. Beauty being a growth stock. After all, management's guidance implies its net sales for the upcoming fiscal fourth quarter of 2025 will only be up by around 2%. But I believe that Q4 will prove to be a temporary blip and it doesn't justify this stock losing two-thirds of its value in recent months.
For its part, e.l.f. Beauty has taken market share by supplying beauty products at low prices. Right now, sales are clearly slowing after years of strong growth, which is one problem. But another problem is that it keeps its prices low by sourcing nearly all of its products from China. And there are escalating trade tensions between the U.S. and China that threaten this supply chain and threaten its profitability.
When it comes to mass-market cosmetics, e.l.f. Beauty has taken more market share than any other company in the past year in terms of products sold, according to Nielsen data cited by the company. This points to a degree of surging popularity that I don't think will go away overnight. It seems more likely for the young brand to keep taking market share for some time yet.
Moreover, e.l.f. Beauty's growth in international markets is just getting started. The company's Q3 international sales were up a head-turning 66% year over year and still only account for 20% of total sales. In other words, these sales can keep growing at a fast rate for a long time. And it's possible that international growth can mitigate some risk from trade concerns in domestic markets.
There are legitimate reasons for concern with Five Below, The Trade Desk, and e.l.f. Beauty -- if there weren't, then these stocks probably wouldn't be down considering the market is surging. But there are also reasons to believe that these companies can keep growing and overcome current challenges. I believe all three stocks could be good buys today.
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Jon Quast has positions in Five Below. The Motley Fool has positions in and recommends The Trade Desk and e.l.f. Beauty. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
