A lot of the market's best growth stocks went on sale this past week. Poorly received quarterly reports soured investors, and in one case it was a surprising merger that didn't sit well with Wall Street. There's a strong case to be made for them bouncing back.
Livongo Health (LVGO), Fastly (FSLY 2.21%), and Twilio (TWLO 1.79%) are some of hot stocks that cooled off this week. Let's go over the recent setbacks that make them top growth stocks to buy now.
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Livongo Health
A disruptor acquiring a disruptor is usually a big win for growth investors, but that's not the way things played out when telehealth leader Teladoc Health (TDOC 0.47%) announced that it would be acquiring Livongo Health in a cash and mostly stock deal. Both stocks have taken a beating since the combination that initially valued Livongo at $18.5 billion was announced on Wednesday morning.
Teladoc shares have plunged 22% in the three trading days since the deal was made public. Livongo -- despite getting taken out at an implied premium -- has surrendered 16% of its value. The market is implying that the combined company is worth less than the two players on their own, but there's a lot to like in the new Teladoc once the Livongo deal goes through later this year.
Livongo is a fast-growing digital health monitoring specialist of chronic conditions. It created a niche it calls applied health signals, working initially with diabetes patients to deliver better outcomes through data science to interpret glucose meter readings and deliver more effective wellness coaching.
Wednesday morning's second quarter report was a forgotten afterthought, but it was a beauty. Revenue growth accelerated at Livongo for the first time as a public company, rising 125% to $91.9 million. There are now 410,000 members enrolled in Livongo for Diabetes, up 113% over the past year. Livongo is just starting to scratch the surface with other chronic conditions for its platform to tackle.
Joining forces with Teladoc makes sense, and it should help both platforms improve on their low penetration rates within their target markets. Both stocks are attractive after the market's misplaced bearishness, but I'm going with Livongo here as it is the faster growing of the two companies and is currently trading at a discount to the deal.
Fastly
Earnings season can be cruel even in a blowout situation. Fastly shares have plummeted 27% in the two trading days since posting its latest financial results. The quarter itself was solid. Revenue growth accelerated for the content delivery network, climbing 62% to a better-than-expected $74.7 million.
Two things that held the stock back were Fastly's monster gains earlier this year and U.S. tensions with TikTok. Fastly stock was one of 2020's biggest winners, up 443% year-to-date through Wednesday's close. There's a lot of helium in that surge, and a post-earnings sell-off is warranted.
The TikTok situation is a bit more nuanced. Fastly provides services for TikTok parent ByteDance, and it's actually its largest customer. TikTok accounted for 12% of its revenue through the first half of the year. With the White House threatening to shut down stateside access to TikTok -- and half of Fastly's business with TikTok originating from U.S. users -- it was easy to see why some investors got nervous.
Both concerns are overblown. Fastly's fundamentals continue to improve, making the sell-off a buying opportunity. As for TikTok, things don't have to end badly for Fastly in the extreme scenario in which TikTok isn't able to square away a deal for either a suitor or a resolution. Fastly believes that it's in a position to backfill the majority of the traffic it would lose if TikTok goes away.
Twilio
Another of 2020's big winners that's enters the weekend on a losing streak is Twilio. The leading provider of in-app communication solutions has fallen in each of the week's last four days, shedding a total of 13% of value in the process. Twilio reported fresh financial results on Tuesday afternoon.
The report was a beat on both ends of the income statement. Revenue rose 46% to $400.8 million, comfortably ahead of the $368.2 million that Wall Street pros were modeling. Its adjusted profit tripled for the quarter. Analysts were settling for red ink.
There were some hiccups. Twilio's dollar-based net expansion rate -- a metric that measures how much returning customers are spending -- declined sequentially to 132%. Twilio also took advantage of its buoyant stock to sell $1.25 billion in new shares. It's still hard to bet against Twilio as more hot apps turn to its platform to deliver more engaging mobile applications.
Livongo Health, Fastly, and Twilio continue to be some of this year's top growth stocks. Taking a big step back this week will only help it take more steps forward in the future.
