Investing in growth stocks is not as simple as scooping up shares of TSX stocks rallying on the stock market. As a new investor, it is important to learn how to choose growth stocks rationally. Ideally, you should look for stocks with the potential for significant growth but trade at reasonable prices rather than blindly jumping on bandwagons when you see some stocks rallying on the stock market.
As of this writing, the S&P/TSX Composite Index, Canada’s benchmark index for equity securities, is at all-time highs. Yet, there are several growth stocks priced at attractive valuations that can make them good investments to consider for investors who want to capture wealth growth through unrealized capital gains.
Today, I will discuss two such stocks that can deliver on the promise of substantial growth in the coming years.
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Payfare
Payfare (TSX: PAY) is a $399.68 million market capitalization global fintech company that offers instant payment, mobile banking, and loyalty-reward solutions.
The company’s fintech platform is used by companies worldwide to empower next-generation workers, with some notable brands using it, including DoorDash, Lyft, and Uber. In simpler terms, it is a wage access company that offers instant access to earnings to workers through its platform, making it essential for the gig economy.
The company’s second quarter of fiscal 2024 saw it grow sales by 20% compared to the same quarter last year, and its active users increased by 24%. Its free cash flow increased from $0.2 million to $9.6 million in the same period.
As of this writing, Payfare stock trades for $8.32 per share, reflecting an 11.98 forward price-to-earnings (P/E) ratio. The P/E ratio suggests it is cheap and has the potential to grow significantly before reaching a fair valuation.
Docebo
Docebo (TSX: DCBO) is a $1.76 billion market capitalization company that offers a robust cloud-based learning platform for internal and external enterprise learning. Its cloud-based learning platform is highly configurable and is in use worldwide, particularly becoming popular during the boost to remote-work culture brought by pandemic-induced restrictions.
The company has grown its revenue at a 63.9% annualized rate for seven years, increasing the average contract value at a 25/1% compound annual growth rate. More recently, the company has been investing in developing artificial intelligence-powered tools and features that will continue strengthening its position in the market.
As of this writing, Docebo stock trades for $58.29 per share, down by 2.96% year to date and down by 23.57% from its 52-week high. Given its substantial long-term growth potential, the stock is too attractively priced to ignore.
Foolish takeaway
Investing in tech stocks became synonymous with growth investing, particularly during the pandemic boom for the industry. While the subsequent tech sector meltdown tempered investor sentiments, the right tech stocks still have the potential to deliver outsized returns to investors in the medium to long term.
The top tech stocks have the ability to grow their financials above the industry average. Due to their growth prospects, investors are willing to pay a premium, thereby raising valuations.
With Payfare stock and Docebo stock trading at arguably discounted valuations, these two tech stocks can be good additions to your self-directed portfolio. It is important to remember growth investing carries inherent risks. However, investors with a well-balanced portfolio who are willing to take some risks can consider these two.
