While tech titans continue to dominate headlines, a trio of smaller but faster-growing companies are making waves in their respective industries.
Do not be mistaken.
Smaller is only a reference to the tech titans. These companies are leaders in their own fields.
To give you a sense of their size, both Arista Networks (NYSE: ANET) and Shopify (NASDAQ: SHOP) have a market cap that is greater than DBS Group (SGX: D05), the largest bank in Southeast Asia.
Even The Trade Desk’s (NASDAQ: TTD) market cap is a whooping US$64 billion, more than two third that of DBS.
Let’s delve into their latest earnings reports, and explore why these companies are poised for continued growth.
Arista’s exception execution with robust growth potential
Arista’s revenue growth hit a high for this financial year, increasing by 20% year-on-year (YOY).
Its earnings per share (EPS) is particularly impressive, showcasing its strong operational performance.
The company’s AI networking segment is gaining traction and will move from this year’s pilots to more production in the next two years.
Interestingly, during the earning call, CEO Jayshree Ullal shared that the company has now won five out of the five AI trials, instead of four.
The progress varies though with three into the pilot phase, the latest one on trial and one moving slower than expected.
Beyond the new AI back end opportunity, Arista continues to gain market share and is getting more invitations for enterprise deals.
Based on my observations of the company over the past few years, I’ve consistently seen it surpass expectations. Therefore, I’m confident that it will be able to meet its current goals.
Shopify’s growth gaining traction
I am a fan of Shopify’s business model. I loved it so much that I bought too much at too high a price initially.
Nonetheless, this is one counter that I held on to my conviction even when its price plunged by more than 85% from its high of US$176 to low of US$26 in 2022!
I am glad that the company has overcame that difficult period. The turning point was the selling of its logistics business Flexport in 2023 as it refocused on its core e-commerce platform.
Shopify’s impressive growth streak persists, with six straight quarters of over 25% revenue growth (excluding logistics).
The company’s expanding free cash flow margin underscores its strong financial performance and future potential.
Shopify’s momentum is undeniable, as it continues to deliver strong growth in key metrics like Gross Merchandise Volume (GMV), Shopify Payments, and Subscription Solutions.
The following part of CEO Harley Finkelstein’s opening address from the earning calls aptly summarises the company’s growth prospects.
“One, entrepreneurship and commerce are growing, and Shopify is capturing an increasing share of this vast and expanding market. Two, Shopify is increasingly the go-to-platform of choice not just for entrepreneurship, but for all of commerce. We are well-positioned for extensive growth across different merchant segments, size, geographies, channels, and products. And three, as our merchants do better, Shopify does better. Our business model prioritises merchant first, fuelled by a high-velocity product innovation engine that makes the hard things easy and everything else possible.”
– Shopify 3Q 2024 Earnings Call
It’s Still Early Innings for The Trade Desk
I recently re-invested in The Trade Desk in March and have added to my position twice since then. While I missed its initial explosive growth, I believe the company still has significant growth potential.
The company is unlikely to repeat its previous feat of quadrupling revenue in five years, but doubling sales in three years seems achievable based on its current trajectory.
My confidence also comes from the company’s list of established customers. Their choice of The Trade Desk as their advertising partner speaks volume of the company’s capabilities.
And hey, did you spot that familiar local brand on the list?
To learn more about The Trade Desk’s remarkable rise against advertising giants like Google and Facebook, check out my recent article on The Smart Investor: “David vs Goliath: The Trade Desk’ Rise to Power”.
They are Too Expensive!
Although the current valuations of these three companies are elevated, their strong growth trajectories suggest that these prices could be justified in the long term.
For instance, if Arista sustains a 40% annual increase in free cash flow for the next two years, its P/FCF ratio could drop below 20x at its current US$395 price point.
However, given the volatility of the US market, you might consider waiting for a potential correction before initiating a small position in these companies, if you believe they are worthy long-term investments.
For now, I plan to just hold onto my existing positions.
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