After a strong rally to start the year, growth stocks are starting to slide once again. And it’s understandable why. Inflation appeared to be letting up for a bit, but data has started trending the wrong way. As a result, the Federal Reserve has redoubled its rhetoric around higher interest rates and putting out the inflationary fire.
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This is not ideal for the tech industry. Investors have to be particularly cautious with growth stocks given the macroeconomic headwinds running against the sector. That said, it’s not all bad news. Valuations have come down a long way. For growth stocks which still have strong fundamentals, forward returns from here could be stellar. These 10 growth stocks have what it takes to prosper despite current inclement conditions:
— Microsoft Corp. (ticker: MSFT)
— Spotify Technology SA (SPOT)
— Sociedad Quimica y Minera de Chile SA (SQM)
— Clearfield Inc. (CLFD)
— Qualcomm Inc. (QCOM)
— Visa Inc. (V)
— XP Inc. (XP)
— Global Payments Inc. (GPN)
— Tradeweb Markets Inc. (TW)
— Lightspeed Commerce Inc. (LSPD)
Microsoft Corp. (MSFT)
Investors are suddenly rushing to invest in artificial intelligence companies. The success of the ChatGPT AI platform has attracted major mainstream interest. While AI has long been a common theme in science fiction, it’s starting to seem more realistic given the recent breakthroughs in AI chat and image generation technology. While there are pure-play AI companies, those tend to be small and unprofitable at the moment.
For a safer AI pick, there’s Microsoft. The company is developing a first-mover advantage after incorporating AI into its Bing search engine. Over time, look for a strong AI offering to make its way into Office and other core products, helping to redefine what’s popular within the Windows work environment. AI also demands very high levels of computing power. That builds wonderfully into demand for Microsoft’s Azure cloud hosting product. Put another way, Microsoft is perfectly positioned to win on multiple fronts as AI solutions gain further adoption.
Spotify Technology SA (SPOT)
2022 was a dour year for the streaming industry. It started on the video side where a seeming race to the bottom prevails. Not resigned to letting Netflix Inc. (NFLX) run away with the market, a host of rivals came in with competing services, leading to declining profitability amid a brutal war of attrition. Spotify seems to have gotten caught up in this sentiment, even as there is much less competition in audio than video. Spotify has overwhelming market share for music and podcast streaming in many international markets.
Even in the U.S., it’s largely a fight between Spotify, Apple Music and YouTube, making audio a more concentrated industry than in video, which has a wider landscape of competitors. Spotify has strong network effects around playlists and music sharing. Its investments in original content help the platform stand apart, as well. Ultimately, audio makes for a great subscription product. Spotify hasn’t quite solved the profitability problem yet, but as long as it keeps attracting more subscribers, its valuation should rise.
Sociedad Quimica y Minera de Chile SA (SQM)
A Chilean mining company probably isn’t the first thing most people think of as a growth stock. However, this company is a leading purveyor of lithium. As such, SQM is an integral part of the emerging electric vehicle and battery story. And it has the growth to back that up. SQM’s revenues have soared from $1.9 billion in 2019 to more than $10 billion annually today. The world is in desperate need of more affordable lithium supplies. SQM has both the ample reserves and the favorable geography to deliver a reliable supply of lithium to its customers.
Chile, while having its problems, is far more stable and secure than most other emerging markets where lithium can be found in sufficient quantities. Lithium companies have fallen sharply in recent weeks due to a slowdown in the Chinese battery industry. That said, for longer-term investors, the dip should be a great opportunity.
Clearfield Inc. (CLFD)
Clearfield is a smaller growth company focused on the market opportunity in broadband internet. The company provides fiber protection, management and delivery services. In effect, it provides the tools and services necessary for telecom companies to deploy new broadband solutions at scale.
Clearfield has enjoyed tremendous growth in recent years. Revenues jumped from $93 million in 2020 to $271 million in 2022. Some of that is tied to the stay- and work-at-home trends seen over the past several years. However, broadband investments are done on a long-term basis, so upswings tend to go on for years at a time. As companies like Verizon Communications Inc. (VZ) continue to invest billions more in speeding up their networks, it creates an ongoing opportunity for Clearfield. Meanwhile, Clearfield shares have dropped by about 50% over the past few months. That puts shares at just 14 times forward earnings today.
Qualcomm Inc. (QCOM)
Clearfield is hardly the only company poised to benefit from the increasing demand for data. Qualcomm is the leading player in the field of mobile telecommunications electronics. Specifically, Qualcomm holds the keys to the semiconductors that power smartphones. Qualcomm built its business around the patents and intellectual property for 3G and 4G mobile networks. It continues to have a pivotal role in the rollout of new 5G networks.
In addition, Qualcomm has developed its own chipsets, such as Snapdragon, which power high-end phones and tablets. Shares of Qualcomm dropped sharply in 2022 amid delays in 5G installations and concerns around smartphone demand. However, there’s little doubt that demand for faster mobile data networks will only increase in coming years. Meanwhile, Qualcomm shares sell for less than 14 times forward earnings.
Visa Inc. (V)
“Don’t fix what isn’t broken.” This old adage applies perfectly to Visa. Fintech and cryptocurrency companies have spent untold billions of dollars trying to disrupt credit card companies. And yet, Visa and Mastercard Inc. (MA) stand stronger than ever. Turns out, it’s hard to top Visa, which can provide instantaneous transactions virtually anywhere in the world at rock-bottom fees while protecting both consumers and retailers from fraud. To the extent that people complain about fees, it’s usually the card’s issuing bank, not Visa itself, that is taking the lion’s share of that transaction.
[See: 10 of the Best Stocks to Buy This Year.]
In any case, Visa has seen its revenues move to new all-time highs now that the world economy has reopened. Visa has a stunning growth record with revenues growing at a compound annualized growth rate of 11%, free cash flow at 15%, and earnings at 24% over the past decade, respectively. While Visa’s operations are already delivering record results, shares are still merely flat compared to where they were trading prior to the onset of the pandemic. That makes for a great entry point.
XP Inc. (XP)
XP is a leading Brazilian brokerage platform and investment banking company. The company found an opportunity in the market, bringing an approach focused on digital distribution. This shook up the traditional Brazilian brokerage business, given that they hadn’t invested as much in technology. In addition, XP has taken steps to try to educate younger traders and broaden the investor class within Brazil. This was well-timed given the surge in new trading seen around the world since 2020 with the rise of meme stocks and cryptocurrencies.
Unlike a lot of fintech companies, XP has focused on profitability from the beginning, and shares currently trade for less than 10 times forward earnings. XP has seen its near-term outlook stumble amid the surge in interest rates, which tends to reduce trading activity and opportunities in investment banking. Regardless, XP grew revenues from $750 million in 2018 to $2.5 billion last year, and should continue to consistently grow in the decade to come.
Global Payments Inc. (GPN)
The continued growth of credit card companies also creates opportunities for the merchant acquirers. These are the companies that provide credit card terminals and associated software and services to merchants. As Visa and Mastercard grow, the size of the merchant acquirer market grows in tandem. Global Payments, in particular, powers solutions for its clients to accept cards, checks, electronic payments and digital wallet transactions. It also powers back-end solutions such as tax accounting, analytic tools and fraud protection.
The company has been a growth machine, with revenues rising 16% per year compounded over the past decade. Global Payments shares have fallen by nearly half since their 2021 peak amid the broader payments industry wipeout. Despite that, Global Payments continued to grow in 2022 and expects additional double-digit earnings growth in 2023. Shares go for about 11 times forward earnings.
Tradeweb Markets Inc. (TW)
Tradeweb is a financial services company which primarily offers brokerage services. Specifically, the company operates a bond trading platform allowing clients to trade various fixed-income and interest-rate products. Most financial products largely switched to digital trading years ago. That makes sense, as things such as stocks are fungible. One share of a company is equal to another, and there is tons of liquidity in the listings of large companies.
Bonds, however, have covenants and other specific features which make them more complicated. Long story short, digital bond markets have been much slower to develop than other platforms. Tradeweb is now taking advantage of this opportunity. It has grown revenues from $563 million in 2017 to $1.19 billion last year. It has also done so while taking market share from key rival MarketAxess Holdings Inc. (MKTX). Tradeweb shares fell last year. But with interest rates remaining volatile, trading activity should be elevated, leading to further profit growth for Tradeweb.
Lightspeed Commerce Inc. (LSPD)
Lightspeed Commerce runs a cloud-based point-of-sale, or POS, system. Retailers use these to manage the transaction check-out process. In addition to general retail, Lightspeed has tailored solutions for niches such as restaurants and hospitality. Lightspeed is smaller than rivals such as Block Inc. (SQ) or Shopify Inc. (SHOP), giving it more potential upside as it continues to grow. Lightspeed initially enjoyed tremendous success, with shares rising as much as tenfold in the early days of the pandemic as retailers rushed to adopt more advanced checkout solutions.
Lightspeed grew revenues from just $57 million in 2017 to $548 million in fiscal year 2022. Analysts expect roughly 25% per year top-line growth going forward. Meanwhile, the company is expected to reach profitability in 2024. With shares trading down from an all-time high of more than $125 per share to less than $16 now, Lightspeed has dropped enough and now represents a contrarian buying opportunity.
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10 Best Growth Stocks to Buy for 2023 originally appeared on usnews.com
Update 02/23/23: This story was previously published at an earlier date and has been updated with new information.
