The current bear market has created many attractive growth stock opportunities.
Growth stocks have had a difficult year. Companies focused on disruptive technologies, and in particular firms that aren’t profitable yet, have fared especially poorly. After a decent relief rally this summer, tech shares have once again turned lower in August. Investors may understandably be scared of growth stocks right now given the difficult macroeconomic backdrop. With inflation remaining high and layoffs picking up at many tech companies, a cautious attitude makes sense. But amid the concerns there’s also opportunity. Valuations have come down significantly since last year, and many growth companies will still be able to execute on their longer-term vision despite the current slowdown. These 10 growth stocks hold particular promise looking out over the next year and beyond.
Visa Inc. (ticker: V)
Visa, along with Mastercard Inc. (MA), continues to dominate the credit card industry. Those two have massive market share and enviable business models. Visa, for example, takes no credit risk during a transaction; that all goes to the bank or other institution which issues the card. Visa, instead, makes its money taking a tiny fraction of each transaction, often less than 0.2% of every purchase. That fee, however, adds up over billions of annual swipes. Because Visa’s fees are so low, it has proven nearly impossible to disrupt. A raft of rivals including fintechs, other credit cards, and cryptocurrency have tried to upend the payments market but to minimal effect. Visa shares have underperformed lately as international commerce has been slow to recover since the pandemic. With global economies reopening however, Visa should be back to its usual double-digit earnings growth in no time.
Adobe Inc. (ADBE)
Adobe is one of the pioneers in the design and graphics software industry. It built its business on mainstay programs such as Illustrator, Photoshop and InDesign. These businesses have enjoyed tremendous growth in recent years as Adobe has raised pricing through a switch from licenses to recurring subscription revenues. Adobe has now moved to offering a broader platform beyond just graphics design. Its Creative Cloud now has a variety of other useful services such as digital document signing. Adobe shares generally have been quite expensive on a price-earnings or free cash flow basis. However, with shares down 28% in 2022 through Aug. 23, Adobe shares are now at a reasonable entry point with the stock going for just 28 times forward earnings. That’s a fine offer for a company that has a long history of double-digit annual growth while generating massive profit margins.
Salesforce Inc. (CRM)
Salesforce is a leading enterprise software platform. The company is known for its customer relations management software, which helps businesses market to potential clients. Salesforce has reliably grown its revenues by at least 20% per year dating back to the turn of the century, making it one of the vanishingly few large companies that have ever achieved such a long run of consistent, rapid growth. While Salesforce’s core market is starting to become saturated, it has branched out in recent years, developing a broader enterprise cloud solution. Acquisitions such as that of workplace communications tool Slack have made Salesforce even more indispensable to its clients’ workflows. CRM stock remains down sharply on the year and is a deep value at today’s prices. Morningstar’s Dan Romanoff sees fair value at $305 per share, indicating that the stock could be more than 40% undervalued today.
When investors think of growth stocks, their first thought is often Big Tech companies. Lately, those haven’t been such great performers as the FAANG trade has lost its luster. However, Alphabet still has merit as a Big Tech growth investment. With GOOGL stock down more than 21% in 2022 through Aug. 23, shares are now selling for less than 22 times forward earnings. That’s an attractive valuation for a company that has had no trouble growing its earnings at more than 14% per year compounded over the past decade. Google’s core search business remains as strong as ever. Arguably what’s even more exciting are the firm’s “moonshots.” There are advanced investments in fields such as autonomous driving, next-gen health care solutions, artificial intelligence and quantum computing. The timeline for monetizing these technologies is uncertain, but they add considerable potential upside to an already reasonably priced stock.
Netflix Inc. (NFLX)
Netflix has plunged this year as streaming competition has taken its toll. The company lost subscribers for the second quarter in a row, with 900,000 more net subscribers leaving the service this past quarter. Management has guided to renewed subscriber growth starting next quarter. However, investors remain nervous as video streaming currently seems like a race to the bottom. With so many rivals offering content and undercutting Netflix’s pricing, it’s a tough competitive environment. But this won’t last forever. Most other media streaming companies have seen their share prices tank as well. Long story short, investors won’t keep bankrolling losses at lower-tier streaming services indefinitely. As the market consolidates, Netflix will win out. Its extensive content library, great user interface, and massive advantage in overseas markets should make Netflix one of the long-term winners in the streaming industry.
Global Payments Inc. (GPN)
Many investors view growth versus value as a binary distinction. But sometimes a company can offer both qualities at the same time. Global Payments is an all-in-one payments platform offering merchants the ability to receive funds via cards, checks, electronic payments and digital wallet-based offerings. Global Payments operates in most verticals of the industry, offering payment terminals, enterprise software, transaction reporting, analytic tools, and so on. Global Payments has enjoyed tremendous growth, with its revenues compounding at 16% per year over the past decade. Despite its enviable track record, shares are now selling for less than 14 times forward earnings as it has gotten caught up in the broader plunge in the payments industry.
Spotify Technology SA (SPOT)
The terrible year for the streaming industry doesn’t stop with television. Leading music streamer Spotify has also seen its share price collapse in recent months, with the stock down more than 50% so far in 2022. However, the core business is still performing well. Subscriber growth is continuing, and management sees a path to 1 billion active monthly users by the end of the decade. A big part of that is by keeping churn low. Spotify’s extensive catalog and well-liked user interface have kept its churn rate under 4%. That’s very healthy compared to many video streamers and hints at the better economics of the music streaming model long-term. Investments in podcasts and other adjacent platforms should also help lower Spotify’s dependence on royalty-paying music over time. The company is facing certain headwinds now, such as the strong dollar, that hurt international revenues. However, Spotify’s long-term trajectory remains promising.
Tradeweb Markets Inc. (TW)
Tradeweb is a financial marketplace company that operates bond trading platforms. Historically, bond trading has been one of the last financial assets that has resisted digitization. Unlike stocks, futures and currencies, bonds often have more quirks and contract-specific features that make them harder to trade without human brokers. But Tradeweb and primary rival MarketAxess Holdings Inc. (MKTX) are working to change this. Since the pandemic started, in particular, digital adoption of bond trading solutions has accelerated. And within the digital arena, Tradeweb has taken market share from MarketAxess. This has resulted in Tradeweb’s revenues soaring from $563 million in 2017 to a projected $1.2 billion this year. Tradeweb shares are still expensive on trailing valuation metrics, but the business is growing quickly and earns fat profit margins. Meanwhile, shares are down 28% year to date through Aug. 23, creating a solid entry point.
Grupo Aeroportuario del Pacifico SAB de CV (PAC)
Mexico’s Grupo Aeroportuario del Pacifico, or Pacific Airports, has a license to operate 14 airports in Mexico and Jamaica. Its primary concessions run until 2048 and include the large cities of Guadalajara and Tijuana along with tourist destinations such as Los Cabos and Puerto Vallarta. Despite the pandemic, Pacifico’s profits and airport traffic have now reached record highs. Over the past decade, the firm has grown earnings by 10% per year and free cash flow by 15% per year compounded. With an approximately $500 million expansion of the Guadalajara airport, which will lift its capacity from 15 million to 40 million passengers annually, Pacifico is now building its next growth engine. The wave of new manufacturing facilities in Mexico adds another catalyst for economic growth. PAC stock has risen more than 400% since its 2006 IPO. In addition to capital gains, shares currently offer a 5% dividend yield.
Lightspeed Commerce Inc. (LSPD)
Lightspeed is a small Canadian company focused on offering software-as-a-service solutions for commerce. Its customers are primarily small- and midsize businesses such as retail and restaurant owners. The Lightspeed ecosystem accepts payments and gives merchants ways to contact and interact with their customers. Lightspeed enjoyed tremendous growth over the past few years as the pandemic sped up adoption of digital payments solutions. Lightspeed’s revenues grew from $77 million in fiscal year 2019 to $548 million in the fiscal year that ended in March 2022. Analysts see revenues surging another 37% to more than $750 million during the current fiscal year. However, Lightspeed isn’t profitable yet, and thus shares have plummeted; LSPD stock is down 80% over the past 12 months. With the market capitalization down to $3 billion, shares are attractively valued on a price-sales basis, with the stock going for less than 5 times sales.
10 best growth stocks to buy:
— Visa Inc. (V)
— Adobe Inc. (ADBE)
— Salesforce Inc. (CRM)
— Alphabet Inc. (GOOG, GOOGL)
— Netflix Inc. (NFLX)
— Global Payments Inc. (GPN)
— Spotify Technology SA (SPOT)
— Tradeweb Markets Inc. (TW)
— Grupo Aeroportuario del Pacifico SAB de CV (PAC)
— Lightspeed Commerce Inc. (LSPD)
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10 Best Growth Stocks to Buy originally appeared on usnews.com
Update 08/24/22: This story was published at an earlier date and has been updated with new information.
