Many stocks stumbled in recent weeks due to ongoing concerns about tariffs, escalating trade tensions with China and other trading partners, and rising interest rates. However, that sell-off also knocked down many high-growth tech stocks that have limited exposure to those headwinds. Let's examine three growth stocks investors should consider buying if the market tumbles further.
Tencent (NASDAQOTH:TCEHY) owns WeChat, the top mobile messaging app in China, and a sprawling portfolio of games that make it the top video game publisher in the world. The company is nearly two decades old, but analysts still expect it to generate 43% sales growth and 20% earnings growth this year.
That growth is supported by the expansion of WeChat, which already has 1.04 billion monthly active users (MAUs), into an "all-in-one" platform that offers food deliveries, ride-hailing services, e-commerce services, mobile payments, and other services. It's also supported by Tencent's hit first-party games, like League of Legends and Honor of Kings, along with its investments in third-party hits like Fortnite and PUBG. Tencent is also expanding its ecosystem into the smart retail, cloud, and AI markets.
Tencent's core businesses of advertising and mobile games are well insulated from tariffs and trade tensions, but the stock recently hit a fresh low for the year. Tencent's stock still isn't cheap at 35 times this year's earnings and 27 times next year's earnings -- but those are reasonable multiples for one of the biggest tech companies in the country.
Square (NYSE:SQ) recently retreated from its all-time highs, but the stock remains up nearly 80% for the year. The payments service provider doesn't have any exposure to China, and its core business continues to flourish. Wall Street expects Square's adjusted revenue and earnings to rise 48% and 70%, respectively, this year.
Square initially disrupted the traditional POS (point of sale) systems market with Square Reader, a credit-card-reading dongle for processing payments on smartphones. It then launched Square Stand, which converted iPads into complete POS systems, and Square Register, a stand-alone POS system that didn't require an iPad.
These solutions were cheaper than traditional POS systems, and were tethered to Square's growing ecosystem of cloud-based services, which help companies manage their payrolls, inventories, customer relationships, deliveries, and e-commerce sites. Square's payments app, Square Cash, is also the third most popular peer-to-peer payments app in America, according to eMarketer.
Square's stock admittedly looks pricey at about 134 times this year's adjusted earnings. But it only trades at 78 times next year's earnings, and that multiple should keep dropping if Square maintains its current growth rate.
I made a big mistake by selling Twilio (NYSE:TWLO) last year, since the cloud service provider's stock has rallied about 130% this year. Twilio's cloud services handle text messages, voice calls, videos, and other services for app developers. Instead of developing those features from scratch -- which is buggy and time-consuming -- developers simply added Twilio's APIs to their apps to tether them to its cloud services.
Today, huge companies like Facebook and Airbnb integrate Twilio's APIs into their apps. Twilio also cross-sells new cloud services to those customers to lock them into its ecosystem. Twilio expects its revenue to rise up to 36% this year as it secures new customers and launches new services, but like many high-growth cloud services companies, Twilio remains unprofitable by both GAAP and non-GAAP measures.
Twilio's stock isn't cheap at 10 times this year's sales, and its lack of profits make it a more speculative play than Tencent or Square. However, the company has a first mover's advantage in a lucrative niche, and the expansion of its ecosystem could eventually turn it into a diversified cloud services giant like Salesforce. After all, Salesforce's former chief operating officer, George Hu, is also Twilio's current COO.
Be greedy when others are fearful...
I'm not saying that investors should buy Tencent, Square, and Twilio right away. But they should keep an eye on these three high-growth stocks, and be ready to buy them if they're unfairly torpedoed by macroeconomic fears.