After an incredible showing for growth stocks in 2020 -- in which many names doubled in value or more -- 2021 was unsurprisingly a much tougher go. Lapping massive growth from the first year of the pandemic, companies driving the digital economy forward were due for some pullbacks.
Nevertheless, the stock price is not always reflective of actual business momentum, and 2022 could have much better things in store for growth investors. Here are the top five companies I'm buying to kick off the new year.
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1. Zoom Video Communications
It's now been well over a year since Zoom Video Communications (ZM 3.49%) stock reached its all-time high. As of this writing, shares are down nearly 70% since the autumn of 2020.
If you've been adding to your position on the way down like I have, Zoom has been nothing but a falling knife that continues to cut those that try to catch it. But at this point, trading for just 30 times trailing 12-month free cash flow to enterprise value, Zoom looks like an incredible long-term bargain. The company is still growing sales at a double-digit pace, it's wildly profitable, and it has $5.4 billion in cash and short-term investments and zero debt on its balance sheet.
Cloud-based communications services are still disrupting the status quo in telecom (which is why Twilio is also still one of my favorites), and sooner or later Zoom and peers will reverse course if they can sustain their business momentum.
2. Teladoc Health
Teladoc Health (TDOC 3.31%) has been another fast-growing business whose stock has been in a free fall for the better part of a year. Share prices are also down nearly 70% from the all-time high reached in January 2021.
The pioneer of healthcare delivered via video conferencing and phone has been struck by the pandemic unwind. Though it is still expanding and adding new capabilities to its digital healthcare platform (like last year's acquisition of connected-health-monitoring company Livongo Health), investors have grown glum on Teladoc stock. The mighty Amazon entering the space certainly hasn't helped the mood.
Nevertheless, Teladoc enjoys a first-mover advantage here. Management revealed it thinks it will grow revenue an average of 25% to 30% per year through 2024 as its current addressable market in digital healthcare continues to expand from a base of some $260 billion in annual spending in the U.S. alone. By traditional metrics, Teladoc isn't profitable yet (although it is when using adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). But if it pulls off its expectations, shares won't keep tumbling forever. I'm adding now to my holdings in this long-term digital-care winner.
3. Block (Square)
The company formerly known as Square recently added another dimension to its branding by changing its name to Block (SQ 5.04%). Investors have been unimpressed. The digital payments industry disruptor has fallen some 37% since the late summer.
Block is a fantastic play on the future of the financial industry. Its payments-solutions segment that helps merchants manage their business in the digital era is still growing at a brisk pace. Inflation expectations for 2022 actually bode well for Block as higher prices mean this toll booth-style operation's fees will rise too (since a fixed percentage of payments are collected from each transaction). Add in Cash App, the consumer-facing business that also allows for Bitcoin and individual stock trading, and this is one fantastic stock to own for the long haul.
Longer-term, Block and peers (like PayPal, another related favorite of mine) should continue to expand if cryptocurrencies and blockchain technology keep picking up steam too. Trading for just 5.5 times trailing 12-month revenue (or just over 11 times 12-month revenue when excluding Bitcoin from the equation), Block stock looks like a timely buy to me right now.
4. Upstart
It's been a while since I've talked about Upstart Holdings (UPST 3.90%), but I wasn't really interested in chasing the massive run-up that took place in its share price this past summer. But now that the company has made a roundtrip ending nowhere (shares are down 60% from all-time highs, nearly back to where they were in early August 2021), I'm ready to start buying again.
Like Block, I view Upstart and other fintech businesses, like SoFi Technologies, as the future of the financial services industry. Upstart in particular caught fire this year as its AI software for assessing consumer loans has picked up serious momentum among banks. The company raised full-year guidance every single quarter in 2021. In the third quarter, the company said to expect full-year revenue to be in a range of $798 million to $808 million -- up from about $750 million before. That is an incredible earnings beat and raise but was a more modest upgrade than quarters past, thus helping put a pin in the share-price bubble.
That certainly doesn't mean this growth story is over though. I expect this software firm for banks and lenders to continue expanding for a long time. At about 51 times trailing 12-month free cash flow-to-enterprise value as of this writing, certainly aren't cheap, but Block looks like an ultra-long-term deal as this young tech company is only beginning to crack open the potential of the traditional lending industry.
5. Marvell Technology Group
Up to this point, you might have noticed my top secular growth themes for 2022: Cloud-based communications (Zoom and Teladoc) and financial technology (Block and Upstart). But I want to add one more secular trend to the mix: Semiconductors, a basic building component of not just technology but of nearly every manufactured good in existence.
Chips are the enabler of computing technology, which has reached a point where computing power and affordability have made computing a key ingredient in all sorts of things, from household appliances to cars. They're also the driving force behind cloud computing, which is reshaping how organizations in every sector of the economy operate. This is why I think Marvell Technology Group (MRVL 1.56%) is an under-the-radar name that deserves more attention.
After a string of acquisitions, Marvell is a leader in data center and cloud chip design. It's also at the heart of the connected auto movement and is building momentum landing deals among automakers. And of course, there are also 5G mobile networks, which are still early in construction and helping stitch together a lot of the tech movements taking place right now. Marvell designs equipment for all of the above and expects to grow at a robust double-digit percentage pace in 2022.
I like lots of other chip stocks out there too, but I've begun taking a larger stake in Marvell than the small position I started late in 2020. This is the only stock on this list not down big from all-time highs (the company reported a fantastic Q3 financial update), and at 16 times trailing 12-month sales, it isn't cheap either. But with the global chip shortage looking likely to last into 2023, I think Marvell will do well next year.
