The price correction for many high-profile growth stocks toward the end of 2021 likely frightened some investors. However, there are still many terrific opportunities in the sector. The key in 2022 will be picking top companies in trending sectors with the potential to outperform not just in 2022 but far into the future.
Growth stocks were flying high in 2021 before inflation worries dampened momentum. Concerns that the Federal Reserve may raise interest rates this year specifically hurts growth stocks that were priced to perfection. As Wall Street revalues potential future cash flows for these stocks, 2022 will be the year to be more choosy.
With all this in mind, here are three growth stocks I'd buy without hesitation.
Image source: Getty Images.
1. CrowdStrike
Cybersecurity is a potent threat for just about every business (as well as federal, state, and local governments) these days. Ransomware, malware, and data breaches cost companies billions each year in lost time and productivity, ransom payments, monetary thefts, systems restoration, and much more. Cyber security budgets are rising accordingly. President Joe Biden has made clear that cybersecurity is a national priority, including issuing executive orders to combat the rising threat. On the back of this, the nation's Cybersecurity and Infrastructure Security Agency (CISA) has selected CrowdStrike (CRWD -0.12%) as a partner to support the endpoint detection and response mission.
CrowdStrike management estimates its total addressable market (TAM) for cybersecurity efforts will reach $116 billion by 2025. That leaves a huge amount of room for growth CrowdStrike's annual recurring revenue (ARR) reached $1.5 billion in the third quarter of fiscal 2022. This is an important milestone for the company, which saw ARR grow 67% over the prior year, as shown below.
Data source: CrowdStrike. Chart by author.
CrowdStrike stock was one of those growth stocks that got caught up in the broader selloff in the latter portion of 2021 and early 2022, and it currently trades more than 37% off its 52-week high. This offers investors an excellent entry point in this fast-growing, integral company.
2. Cloudflare
Edge computing, content delivery networks (CDNs), and securing the Internet of Things (IoT) is another area with tremendous growth potential. As more and more devices come online, securing them becomes a necessity. Similarly, edge computing and CDNs are necessary to maintain websites' speed and efficiency. Worldwide, 95% of internet users live within 50 miles of a Cloudflare (NET 0.78%) data center and 132,000 paying customers rely on the company every day. The company currently has 250 cities in its network and a partnership with JD.com to bring more data centers to China. This international focus is a tremendous opportunity.
Cloudflare is also growing revenue at a tremendous clip and doing this by increasing the number of "large customers," defined as customers that provide more than $100,000 in annual revenue. In Q3 2021, Cloudflare reported 1,260 large customers compared to 736 and 451 in Q3 2020 and Q3 2019, respectively. This amounts to a 67% compound annual growth rate. Company management said its TAM is expected to reach $100 billion by 2024. Cloudflare is also highly scalable, with a non-GAAP gross margin approaching 80%. The stock price is down considerably from its 2021 highs, although it still trades at over 60 times sales. This is because investors recognize the integral role that Cloudflare will play in the future of the internet.
3. The Trade Desk
Finally, digital advertising is a massive opportunity for sustained growth as more and more people get their television from sources other than traditional cable and satellite outlets. There is a paradigm shift in advertising dollars toward connected television, social media, and other programmatic sources. Demand-side platforms play a crucial role in connecting advertisers and their agencies with available inventory. The Trade Desk (TTD 1.41%) provides just such a platform globally. The company also recently announced a partnership with Comcast's NBCUniversal to add the Peacock service to its platform. This is a big win for The Trade Desk and its customers.
The company is growing revenue like a weed and is profitable while doing so. Because of this, The Trade Desk is long-term debt-free and generates significant cash from operations (CFO). In fiscal 2022's third quarter (ended Sept. 30), The Trade Desk generated $215 million in CFO on the back of $301 million in revenue. Revenue was up 40% over the same period in fiscal 2021. This shows that the company has a growing, highly scalable, profitable model. The holiday advertising season will likely lead to The Trade Desk's best quarter on record, showing that The Trade Desk is an excellent stock for long-term investors.
