Investors are betting these companies can post strong growth for years to come.
The stock market is rewarding growth at the moment. Momentum trading is firing on all cylinders, with many growth stocks up over 100% this year.
The first catalyst was the artificial intelligence (AI) boom, which has driven increased returns for technology companies. This most recent leg of the bull market was likely catalyzed by the United States presidential election and the Federal Reserve deciding to start lowering its benchmark rate.
Two supercharged growth stocks investors have been piling into are Nu Holdings (NU -7.44%) and Rocket Lab (RKLB 9.45%). Both companies are growing like gangbusters, with Rocket Lab up 173% year to date (YTD). Nu Holdings is up 91%.
Should you get in on this trend and buy these stocks for your portfolio? Time to take a closer look and find out.
Rocket Lab: The new space race
Rocket Lab is — as the name implies — a rocket launch company. While not nearly as large as SpaceX today, it is trying to catch up with the dominant space economy company that is reportedly worth $200 billion or more. It is one of the very few other private companies that reliably does rocket launches for commercial companies, giving it an emerging leadership position in the sector.
On top of rocket launches, Rocket Lab has invested heavily in space systems hardware (capsules, energy generation, and composites) in order to further bolster its customer offerings. Over the long term, it aims to offer software services and analytics as its third business segment.
Revenue growth for Rocket Lab has been outstanding. Last quarter, revenue grew 71% year over year to $106 million. Over the last three years, revenue has grown by a cumulative 425%, making Rocket Lab one of the fastest-growing companies in the world. It just completed its 54th mission on its small Electron rocket and plans to increase its launch frequency in the coming quarters and years.
At the end of last quarter, Rocket Lab’s backlog increased to $1 billion due to how much demand there is from commercial and government customers for rocket launch services. However, as we sit here today with the stock up close to 200% this year, it is hard to see why someone would buy shares. The stock trades at a price-to-sales ratio (P/S) of 22, which is typically what a company trades at compared to its earnings. Rocket Lab also has razor-thin gross margins of just 25%.
Don’t ride the momentum train into Rocket Lab stock. Even though it is growing quickly, expectations are much too high for this stock right now.
NU PE Ratio data by YCharts
Nu Holdings: Banking Latin America
The second hypergrowth stock on the list is Nu Holdings, which operates Nu Bank. Nu Bank is a digital bank that dominates the Brazilian market and has entered Mexico and Colombia. With all three of these countries sporting large populations and stodgy traditional banking industries, Nu Bank was able to win over existing and new customers due to its sleek mobile application. It currently has over 105 million customers in the three countries, making it the largest digital bank outside of Asia by total customers.
Last quarter, Nu Bank’s gross profit grew 85% year over year on a foreign currency-neutral basis to $1.4 billion. Unlike Rocket Lab, the company is actually profitable, with $487 million in generally accepted accounting principles (GAAP) net income last quarter. Average revenue per customer keeps growing due to the proliferation of Nu Bank’s credit card and lending operations. Customer deposits are growing 64% year over year, which is the lifeblood of a consumer banking operation.
Nu Bank is getting somewhat mature from a customer acquisition standpoint in Brazil, which should lead to slowing growth in the country. However, it is nowhere near this level in Mexico or Colombia, which combined have fewer than 10 million total Nu Bank users. Over the long run, there are plenty of other countries it can enter in Latin America as well.
But what about the stock’s valuation? As we sit here today, Nu Bank has a trailing price-to-earnings ratio (P/E) of 50. Remember, this is different from P/S, as a P/E actually measures the profits being generated for shareholders by the business.
Even though this P/E is elevated compared to the S&P 500 average of 30, Nu Holdings stock looks much more attractive than Rocket Lab here. It is growing faster, is already profitable, and has a long runway to reinvest in customer acquisition for its digital bank in Latin America. So if you want a supercharged growth stock in your portfolio, Nu Holdings might fit the bill.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool recommends Nu Holdings and Rocket Lab USA. The Motley Fool has a disclosure policy.
