A lot of great growth stocks have taken a hit this year, even as the major market indexes hit fresh highs. Some would call the sell-off a shame, but for potential investors, it's also an opportunity.
RingCentral (RNG 2.10%), The Trade Desk (TTD 0.59%), and Fastly (FSLY 2.35%) have all shed more than 30% of their value in 2021. The companies aren't perfect, but the markdowns appear overdone for three dynamic businesses that are still growing by healthy double-digit percentages. Let's size them up, one by one, to see why they are smart buys right now.
It's not fair to call RingCentral a pandemic play. It may be true that its flagship platform, a cloud-based system that routes inbound calls seamlessly to where the recipient may be, benefited from the new normal. Instead of reaching a corporate voice mail extension, RingCentral can reroute an incoming call to someone at an office IP phone, on the go with a mobile device, or anywhere else that an online platform can reach.
The market has bailed on RingCentral since its mid-February peak, but that's a mistake. It was doing just fine before the COVID-19 crisis. Revenue did accelerate to a 45% clip in 2020, but it was already picking up the pace by going from 38% top-line growth in 2018 to 39% the following year.
RingCentral's booming popularity has been the handiwork of telco portability, and that's only going to get more important as we head back to work. More of us will be going hybrid, and we can't afford to lose calls as we bounce around several telco and videoconferencing devices.
It's also worth noting that RingCentral posted better-than-expected financial results earlier this month. It has now come through with 14 consecutive quarters of bottom-line beats. It also boosted its full-year guidance, something that it has routinely done over the years.
The Trade Desk
Advertising may seem like a ho-hum industry, but that was before The Trade Desk upended the way that marketers reach their target audiences. The Trade Desk is the leader in programmatic advertising, using data-driven algorithms to allocate advertising budgets more effectively.
The Trade Desk has been stellar until this year, cashing in on the marketing shift to connected TV, mobile, and streaming audio advertising. Growth is impressive. Revenue climbed 37% in last week's quarterly report, ahead of the 33% to 35% gain that it was previously forecasting. Adjusted earnings blew past expectations, but it wasn't enough. The stock took a hit on the news, largely on the investment's extended valuation heading into the report.
The Trade Desk will be just fine, and its near-term outlook remains strong. The 10-for-1 stock split it announced alongside its report may have been a case of it misreading the room. You rarely see a company announce a split on news that triggers a 26% plunge in the stock price, but The Trade Desk will prevail. It will keep gaining market share. Analysts see revenue growth north of 25% every year through at least 2025.
RingCentral and The Trade Desk have fallen 37% and 35%, respectively, year to date. Fastly takes the cake with its 51% plummet this year through Friday's close. A decade ago, Fastly revolutionized the market for content-delivery networks by building its platform around solid-state caching systems to speed up data transmissions.
Fastly also took a hit last week after posting fresh financials, and in this case it did fall short of Wall Street expectations. I still like Fastly here, especially after shedding more than half of its value in 2021 and plummeting nearly 70% since peaking late fall after losing TikTok as a customer during the U.S. standoff with Chinese-owned companies.
The near-term prognosis isn't as bright for Fastly as it is for RingCentral and The Trade Desk. Year-over-year growth is expected to decelerate to the mid-teens in the current quarter, clocking in flat sequentially. Its CFO is leaving the company. Fastly's dollar-based net retention rate has slipped to 107%, another way of saying that returning customers are only spending 7% more on the platform than they were a year earlier. There are a lot of obstacles here, but Fastly isn't broken. It's just cheap.
RingCentral, The Trade Desk, and Fastly are among this year's most undervalued stocks. They have fallen too hard and too fast for companies with strong platforms posting double-digit growth. They'll bounce back, making them sell-off stocks for opportunistic investors.