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Tech Stock Crash -- Buy These 2 Growth Stocks on the Dip

By Trevor Jennewine - Updated May 21, 2021 at 10:36AM

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Tech stocks have taken a hit. Now looks like a good time to buy a few growth stocks with great potential.

If you're a tech investor, you've probably seen some red in your portfolio recently. Fears over inflation have sparked a sell-off, dragging many growth stocks down in the process. Of course, it's natural to panic, but that's not very productive.

Instead, think of this as a buying opportunity. For instance, Cloudflare (NET -6.64%) and Shopify (SHOP -6.69%) have each fallen over 20% from their 52-week highs, but both look like good long-term investments. Here's why you should consider buying these two growth stocks on the dip.

1. Cloudflare: Cloud computing

Cloudflare is a cloud services provider that makes the internet faster, more reliable, and more secure. Its global network spans 200 cities, and supports nearly 17% of the internet as of April 2021, according to W3Techs. Those are incredible statistics, but they mean more in context. So let's look at a recent product launch.

Man look at downward trending red arrow, which has crashed through the floor.

Image source: Getty Images.

Traditionally, corporations have taken a castle-and-moat approach to networks: All resources were stored on-site, all employees worked in the office, and all incoming and outgoing connections were filtered through central hardware (e.g. firewall boxes, internet gateways). But this model is no longer efficient or effective, since more employees are working remotely and more enterprises rely on cloud computing.

In 2020, Cloudflare launched Cloudflare for Teams to solve this problem. This product is built around Cloudflare Access and Cloudflare Gateway, enabling employees to securely access corporate resources and the open internet whether they are in the office or working remotely.

Moreover, Cloudflare's global network offers performance at a scale that would be impossible for most enterprises to achieve on their own. It also eliminates the need for costly on-site hardware. Put another way, Cloudflare for Teams is faster and cheaper than legacy network security solutions.

Beyond this example, Cloudflare offers a range of other products -- everything from serverless computing to streaming video platforms -- all of which are designed to enhance performance and security.

In total, management believes the company's market opportunity will grow at 9% per year, rising from $72 billion in 2020 to $100 billion by 2024. But Cloudflare's revenue is growing much faster, meaning the company is gaining market share.

Metric

2017

Q1 2021 (TTM)

CAGR

Customers

49,309

119,206

31%

Revenue

$135 million

$478 million

48%

Data source: Cloudflare SEC filings. TTM = trailing-12-months. CAGR = compound annual growth rate.

Going forward, investors should pay attention to Cloudflare's ability to maintain its momentum. The company faces competition from legacy providers like Akamai and public cloud titans like Amazon Web Services. However, Cloudflare is currently growing more quickly than both. That's why this growth stock is a buy for long-term investors.

2. Shopify: E-commerce

Creating an e-commerce website is complicated, especially if you're not a software developer. And managing a business is even more complicated since you need a way to process payments, manage inventory, fulfill and ship orders, and run ad campaigns.

Shopify removes all of this complexity, simplifying commerce. Using its software-as-a-service (SaaS) platform, anyone can easily build an online storefront and manage a business across physical and digital locations.

Exterior of Shopify building in Los Angeles.

Image source: Shopify.

Not surprisingly, Shopify's business has grown at an incredible pace as e-commerce has gained traction around the world. In 2016 the company had 377,500 customers, but that figure double by 2018 and doubled again by 2020, reaching 1.7 million.

At the same time, Shopify has seen strong adoption of its payment processing and shipping services. In 2016 Shopify Payments handled 39% of gross merchandise volume (GMV), but that figure hit 45% in 2020. Likewise, less than 40% of U.S. and Canadian merchants used Shopify Shipping in 2018, but that figure hit 52% in 2020.

Here's the takeaway: Shopify's quickly growing customer base has powered soaring subscription sales, but increasing adoption of Shopify Payments and Shopify Shipping has driven even faster sales growth in merchant solutions.

Shopify Revenue

2016

2020

CAGR

Subscription

$188.6 million

$908.8 million

48%

Merchant Solutions

$200.7 million

$2.0 billion

78%

Total

$389.3 million

$2.9 billion

66%

Data source: Shopify SEC filings. CAGR = compound annual growth rate.

In Q1 2021, Shopify's business continued to gain speed. Subscription sales growth accelerated to 71% and merchant solutions sales growth accelerated to 137%. In total, Q1 revenue came in at $989 million -- more than double its full-year revenue in 2016.

This supercharged financial performance can't last forever, but even as growth slows, I believe Shopify will be an important player in the e-commerce industry for decades to come. That's why this tech stock looks like a buy.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Trevor Jennewine owns shares of Amazon and Shopify. The Motley Fool owns shares of and recommends Amazon, Cloudflare, Inc., and Shopify. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2023 $1,140 calls on Shopify, short January 2022 $1,940 calls on Amazon, and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Cloudflare, Inc. Stock Quote
Cloudflare, Inc.
NET
$68.19 (-6.64%) $-4.85
Shopify Inc. Stock Quote
Shopify Inc.
SHOP
$34.40 (-6.69%) $-2.46

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