GitLab (GTLB 2.70%) and Advanced micro-systems (AMD 5.64%) are two growth stocks that have seen strong momentum in their first quarter results this year. Both stocks have been hit hard by the market selloff, but these companies have a long growth streak ahead of them and should make excellent investments.
While these stocks have significant return potential, new investors should keep in mind that all it takes to get rich on the stock market is time, persistence, and patience. If you just added $1,000 a month to a well-chosen diversified portfolio of stocks, you could easily accumulate savings worth $2.2 million after 30 years. This only earns the average historical market return of 10% per year.
That said, GitLab and AMD are doing some interesting things in the software and semiconductor world that could keep your average yield going into early retirement.
GitLab is a relatively small company with just $290 million in 12-month revenue, but it has seen strong demand for its DevOps software platform that helps employees collaborate and build software more efficiently. Steady earnings growth has given the stock a market capitalization of more than $7.5 billion, which seems high for a company that has posted net income losses. But GitLab’s long-term opportunity is large enough to warrant a high price-to-sell multiple.
The core of the company’s offering is the DevOps platform. It is an application that allows teams to better communicate between operations, IT and software development. This comes in handy when there is a problem that requires troubleshooting. DevOps provides the tools for employees to quickly identify a problem and write new code to fix it.
One of the reasons the platform is gaining popularity is its open source availability, which provides basic functionality at no cost. But the company offers additional features on two subscription tiers.
Despite intense competition in the software development market, GitLab saw a 75% year-over-year increase in revenue in the first quarter, an acceleration from the previous quarter. It’s a good sign that his product continues to hold sway in a competitive environment, especially after Microsoftthe purchase of GitHub for $7.5 billion in 2018.
Of course, GitLab will have to keep introducing new features to stay ahead of heavyweights like Microsoft, but its growth so far suggests it has a differentiated offering that customers want. Management pegs the long-term addressable market for its software at $40 billion. With stocks falling during the bear market as well as the recent acceleration in revenue growth, this software-as-a-service stock could be a real wealth-creating investment.
AMD is a leading supplier of central processing units (CPUs) and graphics processing units (GPUs) for the consumer, enterprise, and data center markets.
Market players are concerned about slowing demand for personal computers and cloud services, where companies are deploying specialized GPUs for processing critical data. Fears that we are headed for a recession are currently weighing on all stocks, but especially on semiconductor companies. This gives investors the opportunity to buy shares of this fast-growing chipmaker at a favorable valuation.
AMD reported a 71% year-over-year revenue increase in the first quarter, but the stock is trading at just 16.7 times the consensus estimate for this year’s earnings. The low price-to-earnings (P/E) ratio suggests that the market values AMD as an average company, but activity is far from lackluster. In fact, the market appears to be significantly undervaluing the additional growth that the addition of Xilinx brings to AMD.
AMD completed its acquisition of Xilinx in the first quarter. The combined company will have a broader chip portfolio to meet demand across a variety of connected devices and new markets over the next decade. Xilinx brings its leading field-programmable gate arrays (FPGAs) and adaptive systems-on-chips (SoCs) to AMD’s line of processors and GPUs for the data center. It’s an impressive offering that could capture part of a $300 billion addressable market over the next decade.
Organizations will continue to invest in advanced chip technology to handle massive data workloads. The market for artificial intelligence chips is exploding, and AMD should benefit from it. Management estimates that revenues can grow at a compound annual rate of 20% over the next three to four years. With stocks selling at an excessively low P/E multiple, AMD stocks are too cheap.