The last two months have been quite tough for growth stocks. With the spread between 2-year and 10-year treasury yields increasing rapidly, that is longer term interest rates moving higher, the market now seems to prefer economically sensitive value stocks over growth stocks. (For the record, value stocks do better when long term interest rates go up.)
The immediate fallout has been a long overdue correction in growth stocks whose valuations have run far ahead of fundamentals. However, there are still a few growth companies whose businesses align firmly with long-term secular trends, and that should drive their stocks despite near term hiccups. Investors, in fact, now have a good opportunity to swoop up these stocks at much cheaper levels than their all-time highs. If you're on the hunt for some top-notch growth companies, then Twilio (TWLO -0.55%), Mastercard (MA -1.19%), and GrowGeneration (GRWG -1.40%) could be the right picks for you.
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1. Twilio
Communication platform-as-a-service (CPaaS) company Twilio had a dream run in 2020, driven by the pandemic-triggered migration of companies to cloud-based architecture. Despite giving up some of its gains amid the ongoing tech sell-off, the stock is still up over 300% in the last twelve months.
Twilio provides developers usage-based programmable application program interfaces (APIs) to build cloud-based communication protocols like email, voice, messaging, and other app services within customers' applications. The company also offers platform services that include access to networking and storage, as well as application services such as the flexible cloud-based contact center platform Twilio Flex and authorization service Authy. Twilio aims to become a leading consumer engagement platform and is targeting a total addressable market of $87 billion by 2023.
Twilio's quality offerings and first-mover advantage have positioned the company as a dominant player in the CPaaS space. The company's dollar-based net retention rate for fiscal 2020 was a healthy 137%, which implies that existing customers are purchasing more from the company. This also translates into an engaged and sticky customer base. In fiscal 2020, transactions with Global 2000 customers were up 76% year over year, highlighting Twilio's rapid shift toward more stable enterprise clientele.
Additionally, Twilio has been rapidly expanding its product and services portfolio through acquisitions. The company acquired SendGrid for $3 billion in 2019 to strengthen its email capabilities. And recently, the company acquired a market-leading customer data platform, Segment, for $3.2 billion in stock. The company plans to leverage Segment's customer data to derive insights that can then be used for further improving the relevance, timeliness, and impact of its customer engagement platform.
Twilio's fiscal 2020 financial performance was quite encouraging. Revenue jumped 55% year over year to $1.76 billion. However, the company's GAAP loss from operations increased from $369.8 million in the prior year to $492.9 million in 2020, mainly due to increased operating expenses and fees to network providers. But the operating expenses grew by 44% year over year -- which is slower than the revenue growth rate. In fact, the company's fiscal 2020 non-GAAP income from operations was $35.7 million, a stark improvement from a loss of $1.8 million in 2019.
Twilio is inching closer to becoming a profitable organization. Hence, it can continue to soar much higher in the coming quarters.
2. Mastercard
The rapid shift of the global economy from cash to cash-less continues to benefit Mastercard, a company that operates the second-largest payment network in the world. The stock is also a solid bet on the potential recovery of the global economy, driven by COVID-19 vaccine rollouts and increased infrastructure spending.
Mastercard and Visa together have a duopoly in the credit card payment processing segment, and earn fees from transactions processed on their respective payment networks. While this business has long been a cash cow for Mastercard, the company is also venturing into other areas of digital payment, including account-to-account payment capabilities and contactless payments for offline purchases. Mastercard is also focused on innovation, as evidenced by its push in areas such as bank-to-bank money transfers, real-time business-to-business (B2B) payments, and a cryptocurrency program.
To support its prepaid crypto card, the company has partnered with payment processors that accept cryptocurrencies to make online and offline purchases -- BitPay in the U.S., and Wirex in the U.K. and Europe. While these prepaid cards involve the conversion of digital currency to fiat currency before the transaction, Mastercard is now focusing on enabling payment transactions without this conversion.
The last year has proved challenging for Mastercard, especially for its high-margin cross-border payments business due to pandemic-related international travel restrictions. In the fourth quarter, revenue fell 7% year over year to $4.1 billion, while net income was down 15% year over year to $1.8 billion. However, the company expects B2B payments and account-to-account remittances to help boost cross-border payment volumes in the coming quarters.
The environment also seems to be improving slightly, as evidenced by a 1% year-over-year rise in fourth-quarter gross dollar volume (purchases made with Mastercard cards). Despite the pandemic headwinds, Mastercard also generated a solid $7.2 billion in operating cash flows in 2020.
Although the pandemic affected consumer spending, Mastercard stock gained over 41% in the last year. With the company well-positioned to leverage the cash-to-cashless tailwind, the stock can continue to rise even higher in coming quarters.
3. GrowGeneration
Hydroponics retailer GrowGeneration is an indirect yet safe way of investing in the rapidly growing cannabis sector. The company, which uses the hydroponic horticulture method of growing plants without soil, operates 52 stores across 12 states in the U.S. With a greater number of states allowing the use of cannabis for medical and recreational purposes, licensed producers are increasingly opting for hydroponic technology to cultivate cannabis instead of the costlier option of outdoor cultivation. This has helped the stock gain over 1,008% in the last year.
GrowGeneration's fiscal 2020 revenue soared 143% year over year to $193 million, while adjusted EBITDA was up 262% year over year to $19.2 million. The company had cash worth $178 million and total debt of $12.7 million on the balance sheet at the end of fiscal 2020. The company is also guiding for revenue of $415 million to $430 million and adjusted EBITDA of $48 million to $51 million for fiscal 2021.
GrowGeneration is trading at 15.7 times sales, which is quite reasonable considering that the company is the largest hydroponics retail chain in the U.S. and is all set to benefit from the ever-increasing demand for cannabis. The company also has a significant online presence and reported solid 123% year-over-year growth in sales from the e-commerce channel in fiscal 2020. With the global hydroponics equipment market expected to be worth $16 billion by 2025, GrowGeneration has only scratched the surface and potentially has a long runway ahead.
