Like most value investors, I like buying my stocks cheap. But unlike most value investors, I skip deep-discount bargains for companies still in growth mode.
I'm talking about industry-leading companies with incredible growth prospects like Square and MercadoLibre. But these stocks rarely come cheap. After all, many investors willingly pay outlandish prices for YOLO stocks like GameStop and AMC -- just imagine how much they'd shell out for the killer combination of quality and growth.
Still, every once in a while, the market can be generous as valuations go from sky-high to pricey, then from pricey to palatable. This typically occurs in a market crash like the one brought on by COVID-19 last March, marking the rare times I get to load up on my favorite stocks.
And speaking of favorites, here are two turbo-charged growth stocks on my radar.
Image source: Airbnb.
Airbnb
Airbnb (ABNB -2.37%) began with an $80 bed and breakfast outfitted with three air mattresses. Today, there are over five million listings on its platform spread across 220 countries and regions.
By operating a massive global platform connecting hosts and guests around the world, the company has lowered costs of travel accommodation worldwide and delivered $110 billion in extra income for users who host guests through its site.
The company's ability to grow -- and do it fast -- is a key to the appeal of the stock to investors. For perspective, its top line surged from $919 million in 2015 to $4.81 billion in 2019. Moreover, its huge existing selection of properties drives a network effect, attracting more users and hosts to its service. As Airbnb builds on this already massive platform, its lead could eventually turn unassailable. And the company has proven its ability to adapt to black-swan situations such as the pandemic.
Together, these factors should help Airbnb grab a bigger share of the global travel market. While it's one of the most popular travel brands globally, Airbnb has an estimated market share of just 1%.
This means if Airbnb successfully executes its plan to evolve into a global travel marketplace -- where users can also book hotels, tours, and flights -- revenue could grow exponentially from current levels. But such potential comes with a high price tag as Airbnb trades at 36 times trailing 12-month revenue. With a market capitalization of $130 billion as of this writing, it already towers above the combined valuation of its two biggest rivals -- Booking Holdings and Expedia Group. Prior to the pandemic, both of those companies had long been profitable whereas Airbnb reported a net loss of $675 million in 2019 (and that loss deepened to $697 million in just the first three quarters of 2020).
So investors hoping to book a spot in this explosive growth story will need patience before a market correction can offer a better deal.
Image source: Getty Images.
C3.ai
C3.ai (AI -7.09%) is a leader in the emerging market for enterprise artificial intelligence (AI) infrastructure and applications. It provides the building blocks to help companies like Baker Hughes and Royal Dutch Shell build and run AI applications.
For example, these applications can turn raw data from sensors into useful predictions, such as when a piece of equipment will fail and need to be replaced. This delivers obvious benefits to the industrial and defense sectors, where uptime and efficiency are important. C3.ai's technology has also found its way to Bank of America -- where it helped build a suite of applications -- and big pharma players like AstraZeneca.
The company predicts that booming demand for enterprise AI will drive its total addressable market to $271 billion in 2024 -- up from an estimated $174 billion in 2020. For context, C3.ai reported $157 million in revenue in the fiscal year that ended April 2020. That's a drop in one massive ocean of opportunity.
Growth potential aside, there are other reasons to like C3.ai. For one, the company operates on a software-as-a-service (SaaS) model that generates highly predictable, recurring revenue. Locked-in customers are less likely to change their software vendor due to high switching costs. And over time, C3.ai can upsell its solutions, boosting customer spending.
Much of C3.ai's success can be attributed to its visionary founder and CEO, Thomas Siebel. An early Oracle employee, Siebel has been working in the technology sector for more than 30 years. As C3.ai expands its business, Siebel's leadership, experience, and network will be a magnet for top talent and new clients.
Like most growth companies, however, C3.ai is still unprofitable. This will likely remain the case as the company advances in the enterprise AI market, investing in new products and expanding its customer base. But overshadowing even Airbnb, C3.ai trades at an eye-popping price-to-sales ratio of 80 -- a valuation that offers no margin of safety.
As a result, both companies leave prudent investors waiting for the next market downturn to offer them a better moment to pounce on the stocks.
