Best-in-class growth stocks are selling at compelling valuations today.
Investors could understandably be tempted to throw in the towel on growth stocks. Every time technology stocks have started to rally, some new catalyst has emerged to push the sector to fresh lows. Between inflation, soaring interest rates, the Russian invasion of Ukraine and mounting tensions with China, it's been a perfect storm. However, this collapse across the growth stock category has made for some compelling opportunities. Numerous companies are selling near their lowest valuations in five years or more. Sure, profits are likely to be down in 2023 given the drop in spending across many verticals in the technology space. However, these 10 proven growth stocks have what it takes to make it through the current downturn and come out stronger.
Here are 10 of the best growth stocks to buy now.
Spotify Technology SA (ticker: SPOT)
The stay-at-home entertainment boom of 2020 and 2021 has turned into a bust now. People have taken advantage of the reopening trend to go traveling and enjoy physical entertainment venues. Netflix Inc. (NFLX) shocked the world when its subscriber growth fell into negative territory earlier this year. Spotify has had similar issues with slowing subscriber momentum. The general worries about insufficient profitability also apply, as Spotify currently distributes a massive portion of its revenues to the artists and record labels. Over time, however, the value of music and other audio such as podcasts will continue to grow. And, given the lack of many strong rivals, Spotify's growing influence and user base will give it more and more power to monetize its existing mindshare. Spotify is a tremendous brand, particularly with millennials, and with shares down 62.1% in 2022 through Oct. 19, investors can take advantage of this current low point to buy a winning platform on the cheap.
Visa Inc. (V)
Visa and its chief rival, Mastercard Inc. (MA), continue to dominate the credit card industry. Despite all the excitement around fintech startups and cryptocurrency, it's proven incredibly difficult to disrupt good old plastic. Visa charges low fees, often less than 0.2% for domestic transactions. And Visa comes with built-in fraud protections and instantaneous transaction clearing. It's a great consumer product, and it's no wonder that credit and debit cards continue to take share from cash and other alternatives. Visa's profits have been somewhat restrained due to the slump in cross-border commerce, where the company can charge much higher fees. However, as international travel has rebounded, Visa's earnings will follow suit. Current economic headwinds may seem troubling, but don't forget that inflation naturally causes Visa's revenues to rise as its transaction fee rises along with prices. Shares are down 10% from pre-pandemic levels, making for a good entry point.
Salesforce Inc. (CRM)
Salesforce is a leading enterprise software platform. The company's roots are in customer relationship management software. In recent years, it has broadened its reach, becoming a workplace efficiency platform. It has done so through acquisitions such as enterprise communications company Slack. Salesforce's revenues have reliably grown at a compound annual growth rate of 20% or more since the turn of the century. It's one of the most impressive growth records among large-cap technology companies. The firm's critics are making noise at the moment, suggesting that the company spends too much on marketing and doesn't earn enough money. Salesforce's stock price has fallen to its lowest valuation, as measured by the price-sales ratio, in many years. However, investors should give Salesforce the benefit of the doubt due to its incredible track record for growth.
Tradeweb Markets Inc. (TW)
Tradeweb is a leading financial marketplace focused on electronic bond trading. Bonds have remained a physically traded product for far longer than stocks. Due to intricacies unique to each individual bond, they were harder to transact without human brokers. However, Tradeweb and key rival MarketAxess Holdings Inc. (MKTX) have formed a duopoly that controls a huge piece of the rapidly growing digital bond trading arena. This is a great time to be trading bonds. 2022 has been a historic year for bond volatility. Now, with the economy softening, credit quality is becoming a concern. That, in turn, should drive even more bond trading as investors reassess their holdings amid this rapidly shifting landscape. While Tradeweb has promising market conditions to look forward to, shares are off more than 46% in 2022 through Oct. 19. That has dropped this high-quality, fast-growing business to less than 26 times forward earnings after traditionally trading at a stratospheric valuation.
Grupo Aeroportuario del Pacifico SAB de CV (PAC)
Grupo Aeroportuario del Pacifico, or Pacific Airport Group, operates 14 airports in Mexico and Jamaica. Its main concessions run through 2048 and include both large cities like Guadalajara and tourist destinations such as Los Cabos and Puerto Vallarta. The company has enjoyed an incredibly rapid recovery in its business operations; as of September 2022, passenger traffic is now more than 25% higher at the company's airports when compared to the same period of 2019. Forget merely recovering to pre-pandemic levels, Mexican aviation has soared beyond its previous peak. With a $500 million expansion of the Guadalajara airport underway, Pacifico is set for far more growth in the years to come. Shares have rallied more than 400% since the company's 2006 initial public offering. Mexico's current manufacturing boom and rise in tourism suggest that the gains will continue in the years to come. Meanwhile, shares also offer a 5.1% dividend yield.
Applied Materials Inc. (AMAT)
Applied Materials is one the world's largest semiconductor equipment and tool makers. The company has been impacted by current trade disputes. Previously, analysts had feared that increased competition from the Chinese semiconductor sector would erode pricing and competitive moats for chip equipment firms. The CHIPS Act, which provides a boost for American semiconductor manufacturers, seems like a winner for Applied Materials. However, there was a view that this might be too little, too late in terms of stopping cheaper foreign competition. The Biden administration greatly ramped up the trade dispute in October with new export controls. These will block many semiconductor sales to China. This will hit Applied Materials' results in the short term and led to the stock hitting new lows. However, longer term, this trade dispute is likely to aid American chip firms. Shrewd investors can ignore the noise and buy this industry leader during the current sell-off.
Uber Technologies Inc. (UBER)
Investors are frustrated with delivery and ride-sharing companies. Despite a surge in deliveries during the pandemic, companies like Uber have been unable to convert demand into consistent profitability. Uber's stock has slumped as investors demand free cash flow generation today. However, the current slump sets the stage for better results in the future. For one, venture capital is becoming much more reluctant to fund other delivery companies. The current down period will cause weaker firms to go out of business, reducing competition. For another, an economic downturn would ease labor market tightness. This would give Uber better and more reliable access to drivers. Uber has been a frustrating investment since going public. But the pieces are falling into place for Uber to gain momentum. Analysts expect the company to become profitable in 2024, and top-line revenues should continue to grow around 20% annually. That's a winning formula.
Amphenol Corp. (APH)
Amphenol is an electronics company that primarily manufactures electrical and fiber optic connectors. Its divisions include harsh environmental solutions, communications solutions and sensor systems. In other words, Amphenol makes the key electronic components that enable modern technology. The company has been in business since 1932, but it remains a remarkable growth story today. It grew revenues from $7 billion in 2017 to $10.9 billion in 2021 and is expected to top $12 billion in 2022. As technologies like the Internet of Things and connected cars take off, there are more and more opportunities to use Amphenol's connectors in a whole range of products. The bull case is pretty simple. With shares down more than 19% in 2022 through Oct. 19, APH stock is now going for 22 times forward earnings. That's a fine price for a company that can consistently grow at a double-digit clip.
Datadog Inc. (DDOG)
Datadog is a software-as-a-service company that leads the way in full-stack monitoring and analytics (FSMA). FSMA solves a major pain point for information technology departments. With large enterprises now having data and analytics in many locations across various clouds and local storage solutions, it's becoming increasingly complicated to keep track of everything in real time. Datadog helps its clients find and neutralize blind spots. As cloud computing grows, IT departments will rely on FSMA solutions like Datadog's to make sure that systems remain functional. Datadog is already meaningfully profitable on an earnings-per-share basis and is growing like a weed. Revenues are up from $101 million in 2017 to $1 billion in 2021. Analysts forecast 57% growth in 2022 and 38% growth next year. With DDOG stock down by more than 50% in 2022, this is a buying opportunity.
Tyler Technologies Inc. (TYL)
Tyler Technologies is a software company focused on providing solutions to state and local governments. It has been a relentless growth machine, posting 16% annualized revenue growth and 21% annualized earnings growth since 2010. The company also estimates it currently controls just 6% of its total addressable market, meaning there is plenty of opportunity remaining. Tyler's focus on the public sector has been highly successful. Governments are slow to switch software solutions; once they pick one, they tend to stick with it for many years or even decades. This gives Tyler Technologies incredibly sticky revenue streams. Its businesses are software solutions for managing courts, taxes, public safety, K-12 schools and so on. These are also all services which tend to have steady demand regardless of what happens with the economy in the short run. Thus, Tyler is well positioned to continue its fantastic growth trajectory despite current macroeconomic headwinds.
0 Comments