2 Top Growth Stocks to Buy Right Now - Motley Fool

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In March 1957, the S&P Composite became the S&P 500 as we know it today, an index comprising 500 of the largest U.S. companies, designed to be a bellwether for the broader economy. Since its inception, the S&P 500 has generated an annualized return of approximately 7.4%, a pace that would double your money once every 10 years. That's not too shabby.

However, if you're willing to do the research, your portfolio could grow even faster. Of course, every investor has their own process, but I start by looking for companies with a competitive edge, a sizable market opportunity, and healthy top-line growth. Those qualities hint at future share price appreciation -- and I think Elastic (NYSE:ESTC) and Unity Software (NYSE:U) check all three boxes.

Here's what you should know about these growth stocks.

Image source: Getty Images.

1. Elastic

Elastic is a search company. Its platform is designed to log data from any source, then search and analyze that information, helping clients tackle a variety of business-critical processes. Specifically, Elastic offers three software products: Enterprise Search, Observability, and Security.

Enterprise Search is a workplace search engine. It helps clients locate specific items across an ever-growing sea of corporate resources, and also allows developers to embed search bars in mobile apps and websites. For instance, Shopify uses this tool to power its merchant-facing help documentation. Observability and Security extend the power of search to the IT ecosystem, surfacing insights related to the health of applications, networks, and infrastructure. This helps IT and security teams identify performance issues and remediate threats.

So where is the competitive edge? According to DB-Engines, Elastic is the most popular enterprise search product on the market, outranking second-place Splunk by a wide margin. In fact, Elastic surpassed 16,000 customers in the most recent quarter -- up 33% from the prior year -- and the average customer spent nearly 30% more over the past 12 months.

Building on that momentum, Elastic's top line is growing quickly, and its free cash flow recently crossed into positive territory.

Metric	Q1 2021 (TTM)	Q1 2022 (TTM)	Change
Revenue	$466.8 million	$672.7 million	44%
Free cash flow	($10.7 million)	$9.1 million	N/A

Source: Ycharts. TTM = trailing-12-months. Note: Q1 2022 ended July 31, 2021.

Management currently puts Elastic's market opportunity at $78 billion, a figure that reflects the enormous impact of digital transformation.

As enterprises spread more resources across public and private clouds, the ability to search, observe, and secure that infrastructure will become increasingly critical. And Elastic's best-in-class solution should help the company capitalize on that massive opportunity. That's why this stock looks like a long-term market-beater.

2. Unity Software 

Unity specializes in content development. Its software allows clients to build, deploy, and monetize real-time 2D and 3D applications across more than 20 different platforms, including iOS, Android, and all major gaming consoles. That's a big deal, because developers have traditionally built content creation tools from scratch, a costly and time-consuming process, and those tools often worked on a per-platform basis, meaning content had to be recoded for each device.

Unity's approach -- build it once and deploy it everywhere -- makes the process more efficient. And that value proposition has helped Unity become a dominant force in the gaming industry: 71% of the top 1,000 mobile games were made with Unity's software, and 94 of the top 100 game development studios are Unity customers. However, its ability to generate revenue doesn't end with content creation.

Unity also provides tools that help developers monetize their games through digital ads and in-app purchases. In this scenario, the company makes money through a revenue-sharing model, meaning it benefits as the games on its platform become more successful. That should make its business less cyclical than the typical gaming company.

Financially, Unity is growing its top line at a steady clip. And while it posted negative free cash flow of $120 million over the past year, its balance sheet shows $1.6 billion in cash and investments, but no long-term debt. In other words, Unity can afford to burn cash while it scales its business.

Metric	Q2 2020 (TTM)	Q2 2021 (TTM)	Change
Revenue	$640.3 million	$929.5 million	45%

Source: YCharts. TTM = trailing-12-months.

Looking ahead, Unity has opportunities beyond gaming. In 2019, it debuted a simulation platform, a virtual world in which engineers can train AI models for autonomous cars and robots. And in 2021, Unity went one step further, launching synthetic data sets that make AI training faster and more efficient. Management believes this extends its addressable market to manufacturing, retail, and security.

Unity puts its market opportunity at $29 billion, leaving plenty of room for future growth. And given its leadership in the gaming space, I think the company is well positioned to pursue opportunities in other industries. That's why this growth stock could help you beat the market over the long run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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