Investors can multiply their money by holding shares of well-chosen growth stocks, and three fool.com contributors are here to show you three incredible opportunities.
Here's why Toast(NYSE: TOST), Sweetgreen(NYSE: SG), and On Holding(NYSE: ONON) could be monster winners.
Restaurants need Toast's software
John Ballard (Toast): The restaurant industry has become more competitive than ever. Customers can conveniently order takeout with their phones, which forces restaurants to adapt to a rapidly changing competitive landscape. This is a huge opportunity for Toast's software, which helps restaurants manage every aspect of their business efficiently.
With just $4.4 billion in trailing revenue, Toast is in the early innings of capturing a $100 billion-plus addressable market. The platform helps restaurants manage ordering, marketing, staff, supply chain, and other operations. This all-in-one solution is attracting more restaurants to sign up, with the company reporting a 29% year-over-year increase in the number of locations using the platform in the second quarter.
Toast's subscription revenue is growing along with that increase. The stock trades at a premium price-to-sales (P/S) valuation relative to its peers in the restaurant software market. But this seems justified, given customer success stories with the product and its intuitive design that makes it easy to train restaurant staff to use it. This bodes well for more robust growth.
Toast is gaining traction with small restaurants, which speaks to its market potential across the restaurant industry. While the stock's P/S ratio of 3 might be expensive relative to its competitors, it doesn't seem all that expensive in the context of the entire software industry, where companies in other markets growing as fast as Toast can trade as high as 10 times sales.
For these reasons, the stock could deliver wealth-building returns to shareholders over the next 10 years.
A breakout restaurant story
Jeremy Bowman (Sweetgreen): One growth stock I keep coming back to in the consumer space is Sweetgreen, the fast-casual restaurant chain.
Sweetgreen got off to a slow start in the stock market. It went public at the worst possible time, in November 2021, just as the pandemic-driven stock market boom was peaking. Consequently, the stock plunged after its debut, but it's bounced back over the past year for good reason. It now looks like a good candidate to soar over the next decade.
Sweetgreen is a leader in an emerging restaurant category, the fast-casual salad chain. People are hungry for easy and healthy takeout options, and Sweetgreen delivers on that account. Its restaurants are also popular. Its average unit volumes of $2.9 million rival Chipotle's, and comparable sales jumped 9% in its most recent quarter, showing customers are coming for more.
Sweetgreen also has a ton of growth potential, as the company finished its second quarter with only around 225 locations.
The company doesn't have a target for how many restaurants to open, but more established chains have thousands of restaurants across the U.S. Chipotle, for example, is nearing 4,000 locations, and expects to open at least 7,000. Considering the uniqueness of its salad concept, Sweetgreen has a good opportunity to expand and could grow its footprint by 10 times or more.
Sweetgreen also has a technological advantage, thanks to a robotic assistant it calls Infinite Kitchen. This speeds up its throughput, helping to increase average checks and save on costs, raising margins. The company is planning to roll out Infinite Kitchen to more of its locations.
Right now looks like a good opportunity to buy Sweetgreen, as it's pulled back from its recent peak, down roughly 20%. At a market cap of just $3.4 billion, the stock could go a lot higher, if it continues to execute.
Premium footwear for the serious athlete
Jennifer Saibil (On Holding): Swiss-based On has burst onto the athleticwear scene with a unique shoe design capturing market share in premium footwear. Loyal fans are spending big bucks to acquire On's CloudTec sneakers, and inflation isn't stopping this affluent crowd.
At the same time that Nike is reporting sales declines, On is demonstrating robust growth. Sales increased 28% year over year in Q2, split almost evenly between direct-to-consumer and wholesale channels. On is still developing its presence worldwide, and it's just in its early innings of growth. Wherever it already has a known name, it has become the footwear of choice for a growing cadre of upscale customers, meaning it has a long growth runway as it creates more fans.
On has a large, global contingent of athlete ambassadors because it targets the serious athlete. However, it's moving toward enlarging its circle and capturing more of the mass market. It recently signed a deal with Zendaya, who's not even an athlete but a "fashion icon," to appeal to the upscale consumer.
On is also already profitable, which isn't a given for a company at its stage. It has industry-leading gross margins, since it charges premium prices and its resilient shopping base is less affected by inflation. It reached 59.9% in Q2, up from 59.5% last year, and net income rose by more than 800%.
On stock isn't cheap. It's up 69% this year as the market recognizes its value, and it trades at a forward 1-year P/E ratio of 40. That's a premium valuation for a premium stock, but it doesn't seem unreasonable for a stock with On's opportunities. On has incredible potential as it slowly rolls out across the world and becomes the new label that shoppers want to wear. Expect On stock to soar over the next decade.
Should you invest $1,000 in Toast right now?
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Jennifer Saibil has no position in any of the stocks mentioned. Jeremy Bowman has positions in Chipotle Mexican Grill and Nike. John Ballard has positions in Toast. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Nike, and Toast. The Motley Fool recommends On Holding and Sweetgreen and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
