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3 Top Growth Stocks to Buy in February

Todd Campbell, Jamal Carnette, CFA, and Nicholas Rossolillo, The Motley Fool

Smartsheet (NYSE: SMAR), Splunk (NASDAQ: SPLK), and The Trade Desk (NASDAQ: TTD) share at least one thing in common: They're disrupting big markets. The potential to reshape how people work makes them intriguing growth stocks that ought to be on everyone's radar right now, so we asked three top Motley Fool contributors to take a closer look. Read on to find out:

  • How reshaping collaboration is translating into rapid growth for Smartsheet.
  • Why improving insight through data analysis could have Splunk on a path to profits.
  • What digital advertising means to The Trade Desk's success.

This collaboration software stock is just getting started

Todd Campbell (Smartsheet): Although Smartsheet isn't widely known to most investors, it's increasingly recognized by companies looking to boost worker productivity and accountability. Cisco Systems, Starbucks, and Roche Holdings are only a few of the big companies using Smartsheet's collaboration tools to help structure project workflows. 

A man draws a rocket in space on a wall.

IMAGE SOURCE: GETTY IMAGES.

In its most recent fiscal quarter, Smartsheet's sales grew 59% year over year to $47 million and its dollar-based retention rate was 132% because few customers unsubscribed and more customers increased their spending. There were over 4.5 million Smartsheet users last quarter, up from 3.6 million users when Smartsheet filed for its initial public offering last year. The number of big spenders on its solutions is going up, too. Last quarter, Smartsheet says 360 companies spent over $50,000, up 148% year over year, and 127 spent more than $100,000 per year. 

The potential for Smartsheet to disrupt project management, productivity, and collaboration markets shouldn't be underestimated. Those markets were worth $21.4 billion market in 2017 and they're expected to grow to $31.6 billion in 2021, according to International Data Corporation.

Importantly, the company's customers appear happy. Exiting Smartsheet's recent customer conference, over 97% of attendees said they'd recommend Smartsheet's solution. Improvements to dashboards, how people assign workloads, time-sensitivity tools, and visualization should help keep satisfaction high while new, premium tools expand revenue at existing customers.

Smartsheet's still losing money, though. Its adjusted loss was $0.09 per share last quarter. But it's predicting rapid growth will continue and it's got $212 million in cash on the books. Its full fiscal 2019 year guidance is for sales of between $174.6 million to $175.6 million, which works out to a 57% to 58% year-over-year increase.

Given the size of its addressable market, the importance of collaboration tools to an increasingly remote workforce, and its success so far, this is fast becoming one of my favorite growth stocks.

Big data keeps getting bigger

Nicholas Rossolillo (Splunk): After having a year's worth of gains erased at the end of 2018, shares of big data parsing company Splunk have rebounded in a big way since the start of the new year -- and for good reason. The company is one of the fastest-growing software providers out there, riding a wave of digital transformation as businesses around the globe try to make better use of their data and streamline operations.

But after a more than 40% rally in the last year, is the stock still worth a look? For long-term investors who don't mind some volatility, absolutely. Through the first three quarters of 2018, revenue was up 39%, led by the important licensed software segment, which carried a whopping 97.3% gross profit margin. When the company reports its full-year 2018 revenue at the end of February, management said to expect a 37% increase over 2017. Preliminary estimates for fiscal year 2020 (the 12 months ending on Jan. 31, 2020) are for $2.15 billion in revenue, another 24% increase over the current year.

If Splunk can pull that off, that means there's plenty of upside left for this growth stock. There's a good chance that happens, especially given the strong demand for the company's software services, which include data analysis, "Internet of Things" device management, and cybersecurity threat detection and investigation. Perhaps the biggest area of growth, though, will be the bottom line.

Splunk currently isn't profitable, running at a loss of $278 million in 2018 at last report. Much of that has to do with the company's aggressive investment in its future as it spent $311 million on research and development and $726 million on sales and marketing through the third quarter. However, adjusting for those expenses, full-year operating margin should be between 11.5% and 12%, capped off with an expected 25% to 26% operating margin in the fourth quarter. Thus, as the company reaches a larger scale, profits will be forthcoming. That should provide plenty of fuel for the stock in the years ahead.  

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IMAGE SOURCE: GETTY IMAGES.

Take advantage of the biggest trend in marketing

Jamal Carnette, CFA (The Trade Desk): Advertising is rapidly shifting from print and television to digital advertising -- search, desktop, and mobile -- as marketing dollars follow eyeballs. However, many brands have struggled with online marketing as the combination of poor ad placement and click fraud decimate digital ad budgets. The Trade Desk uses real-time bidding to improve ad personalization and effectiveness while providing tools to limit ad fraud and increase marketplace quality. The company is doing something right: Shares have been on a tear, up nearly 720% since its 2016 IPO.

The growth story isn't done yet. Through the first nine months of fiscal 2018, the company increased revenue 54% over the prior year -- from $205.5 million to $317 million. Even better, The Trade Desk reported a more than 95% customer retention rate for the 19th straight quarter, a testament to the company's value proposition for brands looking to improve their digital advertising strategy.

Digital advertising has a long runway for growth as other outlets will keep losing share. eMarketer expects U.S. digital advertising to grow from 48.5% in 2018 to 62.1% by 2022. As a result, The Trade Desk's revenue will continue to go up for years to come. 

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Jamal Carnette, CFA has no position in any of the stocks mentioned. Nicholas Rossolillo owns shares of Splunk. Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Splunk and The Trade Desk. The Motley Fool has a disclosure policy.