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Stocks with huge growth potential usually come with additional risk. Stock valuations usually reflect potential gains, but companies with fantastic upside potential usually face tons of uncertainty. That’s not necessarily a bad thing, but we all need to make informed decisions when building our portfolios. Every investor needs to figure out their ideal balance of risk and reward and allocate accordingly.
These two stocks might be too risky for some investors, but people who take the plunge could reap major rewards down the road.
Image source: Getty Images.
1. Zscaler
Zscaler (NASDAQ: ZS) is a cybersecurity stock that provides cloud-based software for large businesses. It focuses on edge security, ensuring that user devices are able to connect with an employer’s network without compromising the data on that network. This is extremely important for any company with a distributed workforce. As working from home and remote collaboration become more common, these security services have become absolutely essential for any enterprise that aims to stay relevant in today’s economy.
This makes Zscaler an exciting opportunity because it’s occupying the right place at the right time. The story gets even more compelling when you consider Zscaler’s leadership position and highly respected product portfolio. The company receives outstanding marks from Gartner, and it’s commonly viewed as one of the leaders of its cybersecurity niche. This translates to high customer satisfaction, and its high net dollar retention rate above 125% is clear evidence that businesses are seeing lots of value in Zscaler products.
This has all translated to great financial results for Zscaler. The company reported 63% revenue growth last quarter. Its full-year forecasts call for an expansion of roughly 55% in sales. By the end of the year, Zscaler’s annualized recurring revenue should be above $1.4 billion. The company isn’t profitable on an earnings basis yet, but it produces positive free cash flow. That means that it can support its high growth without exhausting its financial resources, which is great for investors.
It’s easy to see where Zscaler stock gets its upside. The risk comes entirely from valuation. The stock’s price-to-sales ratio is over 33, and its PEG ratio is above 4. This is a fairly high level, even among promising growth stocks — and its valuation ratios used to be nearly twice as high.
ZS PS Ratio data by YCharts
Zscaler’s stock has experienced some wild valuation swings since its IPO in 2019, so investors should expect continued volatility. The current valuations already assume a ton of growth and strong cash flows, so the company needs to deliver phenomenal financial results just to meet expectations. That requires investors to take a leap of faith. If there’s any indication that it could fall short of its aggressive goals, the stock is nearly certain to suffer big losses, at least in the short term. Even if the company continues to perform well, Zscaler stock can still take a beating if the market is moving downward due to macroeconomic issues.
2. CRISPR Therapeutics
CRISPR Therapeutics (NASDAQ: CRSP) is a gene editing technology company that could drastically disrupt the pharmaceutical and biotech markets. It’s developing a number of medications for various serious illnesses, including various forms of cancer, sickle-cell disease, diabetes, and degenerative diseases. This could greatly improve patient outcomes while making treatment more efficient and affordable.
Gene editing is an emerging industry with no clear leader in the market. CRISPR has a number of medication candidates, and it’s also engaged in joint ventures with high-profile partners such as Vertex Pharmaceuticals. There’s a chance for CRISPR to secure early-mover status in a disruptive industry that’s expected to grow nearly 20% annually over the next decade.
CRISPR’s market cap is currently around $4.5 billion. If its treatments wind up being safe, effective, and affordable, its product portfolio should be worth much more than $4.5 billion, and investors could enjoy huge returns.
Like many biotech stocks, this great opportunity comes with plenty of risk. CRISPR doesn’t have any revenue from commercial sales of its products. There are major regulatory hurdles to clear before it sells a single treatment. It also has to solve manufacturing, logistical, and marketing challenges once it receives approval for medications. CRISPR also faces competition from other gene-editing companies, as well as traditional drugmakers. There’s a good chance that the company will need to raise more cash by selling shares or issuing debt before it becomes stable, which could impact its financial stability.
CRISPR is an exciting healthcare stock for sure, but it is also a high-profile boom-or-bust investment. It could play a role as a growth stock for many investors, but make sure that your portfolio is capable of handling the risk before you dive in.
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Ryan Downie has no position in any of the stocks mentioned. The Motley Fool owns and recommends CRISPR Therapeutics, Vertex Pharmaceuticals, and Zscaler. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
