3 Tremendous Growth Stocks to Buy With $500 Right Now

Since bottoming in early April, the stock market has come roaring back. The S&P 500 closed out the second quarter at an all-time high, less than three months since President Donald Trump’s “liberation day” sent stocks tumbling lower.

But the uncertainty of investors in early April hasn’t dissipated entirely. And with stocks trading higher, the downside risk of growth stocks looks even higher than it was just a few weeks ago. So, someone just starting investing, or even seasoned investors, with an extra $500 to invest in the market, might be worried about throwing away their money on an overpriced stock. The good news is that there are still a lot of opportunities in growth stocks right now, especially if you look beyond those making the most headlines.

There are three companies all producing great operating results, and their stocks don’t look too expensive for what you get. So, with $500 in available cash, you could build a nice starter portfolio with any of these three growth stocks.

Taiwan Semiconductor Manufacturing (NYSE: TSM), or TSMC, is the largest contract chip manufacturer in the world. Chip designers flock to TSMC because of its best-in-class production processes, which allow it to make cutting-edge chips at scale with better yields than competitors. That’s led it to take a two-thirds share of the market as only a couple of competitors are even close to TSMC’s capabilities.

That market share also means it has the scale to handle an influx of demand like we’ve seen over the last two years, as big tech ramps up spending on AI data centers. It can then turn around and invest in building out more scale, and management plans to do exactly that. The company plans to spend roughly $40 billion on capital expenditures this year, adding new facilities and buying new equipment.

On top of that, TSMC is also able to invest more in research and development to stay ahead of its competitors. That technology lead enables it to win more contracts, further cementing its position. In fact, TSMC has seen its next-generation 2-nanometer process improve quickly, reaching 90% yields in some applications. With competitors lagging behind, TSMC is positioned to command a high price for its chips, reportedly asking $30,000 per wafer. That’s a 50% increase from its 3-nanometer pricing. Next year’s 1.6-nanometer chips could command another 50% price hike.

With the growing demand for leading-edge AI chips and TSMC’s biggest customers depending on its technology, the company looks poised to grow quickly over the next few years. Management’s long-term outlook calls for 20% average annual growth overall through the end of the decade. At about $225 per share, the stock currently trades for about 24 times forward earnings estimates, which looks like a bargain given the company’s strong position to keep growing over the long run.

Hubspot (NYSE: HUBS) has carved out a position in the marketing and sales automation software segment, focused on small and mid-sized businesses. Its strategy of bringing in users with a freemium model has enabled it to grow a substantial user base and expand its offerings alongside its customers’ growing needs. As a result, it’s expanded into five verticals across marketing, sales, service, operations, and content management. It’s comparable to Salesforce (NYSE: CRM), but for small businesses.

As Hubspot expands its offerings and increases capabilities with the help of generative AI, it stands to generate higher average revenue per user over time. That comes from a higher take rate from its various “hubs” as well as higher pricing due to expanding feature set. With that scale, Hubspot should be able to produce steady margin expansion. Management set a long-term operating margin target of 25% during its 2024 investor day. That’s up from 17.5% last year.

Hubspot’s biggest challenge is that its small-business customer base is much more likely to churn than bigger competitors like Salesforce, who cater to enterprise-level customers. Hubspot’s retention rate is around 88%. By comparison, Salesforce retains about 92% of revenue. As Hubspot expands its offerings and moves upmarket, it’s seen its retention improve. That should continue to be the case, even if it never reaches Salesforce’s low attrition rates.

With modest sales growth and strong operating margin expansion, Hubspot looks well-positioned to grow earnings quickly over the next few years. With an enterprise value less than 10 times sales, the stock looks priced attractively considering the growth it’s exhibiting. While more expensive than Salesforce stock, you’re paying for the upside growth potential of the company. At about $550 per share, investors with just $500 will have to find a broker that offers fractional share purchases.

Atlassian (NASDAQ: TEAM) makes project management software for enterprise customers. Its Jira and Confluence platforms serve over 300,000 customers with a growing number spending over $10,000 annually with the company. As of the end of its third quarter, it counted 50,715 such customers, up 36% over the last two years.

Pushing Atlassian’s large customer growth higher is its investments in artificial intelligence. Management has shifted to putting its Rovo AI at the center of its software. CEO Mike Cannon-Brookes noted, including Rovo services standard with its Premium and Enterprise level subscriptions will forego some revenue opportunities. However, it should attract more customers over the long run by offering great value and enabling Atlassian to improve its AI services faster.

The efforts appear to be paying off already, with a growing number of upsells to Premium helping Atlassian expand its gross margin 1.5 percentage points from last year on a non-GAAP basis. However, that was offset by increases in operating expenses, particularly R&D and sales, which grew 20% year over year. Still, the non-GAAP operating margin of 25.7% came in above expectations. Management does expect its focus to weigh on earnings a bit more in the fourth quarter, guiding for 22% operating margin.

Over the long run, however, investors should expect operating margin to expand as it scales its AI efforts and works to take market share in an industry growing around 14% per year. With the stock trading for 10.7 times sales, it looks like a good value trading near the lowest valuation from late last year. At just $200 per share as of this writing, investors looking to get started with just $500 should consider adding it to their portfolio.

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Adam Levy has positions in Salesforce and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Atlassian, HubSpot, Salesforce, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

3 Tremendous Growth Stocks to Buy With $500 Right Now was originally published by The Motley Fool