The stock market got off to a rough start in 2022, with the S&P 500 dropping over 8% so far in January, but this is an opportunity for investors to add some solid companies to their portfolios that could turn out to be long-term winners.
After all, buying and holding great companies for the long run is a tried and tested way of watching your money grow. Such a strategy allows investors to reap the benefits of compounding, and also take advantage of secular growth trends that are shaping the future.
Unity Software (U 2.04%) and Twilio (TWLO 1.08%) are two companies that are growing at a blistering pace right now, and they should be able to keep up their impressive momentum, in the long run, thanks to the lucrative markets they operate in.
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What's more, both tech stocks have lost over 30% of their value this month amid the broad market sell-off, which means that investors can buy them at substantially cheaper levels right now. Let's look at the reasons why shares of Unity and Twilio could breakout and deliver solid returns over the next 10 years.
1. Unity Software
The new year has been brutal on tech stocks with rich valuations thanks to the Federal Reserve's hawkish stance, which could result in four interest rate hikes this year. This explains the crash in shares of Unity Software this month. But the good part is that it is now trading at 29 times sales, compared to the 2021 sales multiple of 40.
The dip in Unity stock is a great opportunity for investors to buy a company that's building the future. Unity provides a platform that allows users to create and operate interactive, real-time 3D content. The company points out that its platform is used by artists, architects, automotive designers, filmmakers, game creators, and others to create real-time 2D and 3D content that can be consumed on smartphones, tablets, computers, and AR/VR (augmented reality/virtual reality) devices.
Unity's platform can also be deployed in aerospace, retail, education, and advertising. These wide-ranging applications explain why Unity sees its addressable opportunity growing at a rapid pace. The company estimates that the real-time 3D content space has grown from just $15 billion at the beginning of the century to $159 billion in 2020.
Unity points out that video gaming has been the key driver of this massive growth, but with concepts such as the metaverse coming into play, it wouldn't be surprising to see Unity's platform used in more industries. The metaverse looks like the ideal use case for Unity's platform, as this technology aims to transport users into a three-dimensional virtual world where they can socialize, play, work, and study, among other things, all in real-time.
Given that the metaverse is expected to clock a compound annual growth rate of 41.7% through 2030 as per a third-party estimate, Unity's addressable market could explode. So Unity Software seems on track to sustain its outstanding pace of growth for a long time to come. The company will release its 2021 results on Feb. 3, and it is expected to exit the year with $1.08 billion in revenue, a 40% increase over the prior year.
It is worth noting that Unity's revenue increased 43% and 42% in 2020 and 2019, respectively. Analysts expect the company's earnings to grow at an annual pace of 69% for the next five years. However, it wouldn't be surprising to see Unity Software sustain such a terrific pace for the next decade given the opportunities it is sitting on.
2. Twilio
Twilio is another fast-growing company that investors can buy at relatively cheap levels right now thanks to the sell-off. The stock is trading at 12.3 times sales, which is lower than the five-year average price-to-sales ratio of 16.7 and 2021's sales multiple of 17.5.
Twilio operates in the fast-growing cloud communications market, enabling organizations to engage with their customers through several channels such as text, voice, video, and email, among others. The company's APIs (application programming interface) help Twilio customers move their physical contact centers into the cloud. This was one key reason why the company recorded outstanding growth during the pandemic.
According to third-party estimates, it controlled 38% of the communications platform-as-a-service (CPaaS) market in the second quarter of 2021, occupying pole position. Second-placed Vonage was far behind Twilio with a share of 11.8%, indicating that the latter is dominating this lucrative space.
The robust market share bodes well for Twilio's future, as the global CPaaS market is expected to clock annual growth of 24% for the next decade and hit $46 billion in revenue by 2031, according to Future Market Insights. More importantly, Twilio is making the most of the end-market opportunity.
The company's revenue for the first nine months of 2021 increased 65% over the prior-year period to $2 billion. Twilio will release its fourth quarter and full-year 2021 results on Feb. 9, and the company expects to post $765 million in revenue at the midpoint of the guidance range. That would translate into 39% year-over-year gains. Twilio's Q4 guidance means that it could finish 2021 with $2.77 billion in revenue, an increase of 57% over 2020.
So Twilio is growing at a faster pace than the CPaaS market. This is not surprising, as the company has been going all out to secure a big chunk of this fast-growing market by way of acquisitions to strengthen its offerings. This explains why Twilio has been able to drive incremental spending from its customer base, with its dollar-based net expansion rate remaining above 130% since the beginning of 2020.
Twilio points out that the dollar-based net expansion rate increases when its active customers increase their usage of the company's products or adopt new products. Thanks to the acquisitions it has made over the years, Twilio's cross-selling opportunities have increased as it can offer more products to its customer base. It is also worth noting that Twilio's organic growth is robust, with the company recording 38% year-over-year revenue growth in the third quarter of 2021.
In all, Twilio is in a strong position to win big from the fast-growing CPaaS market in the coming decade, making it an ideal bet for investors looking for a breakout growth stock that has become attractive amid the sell-off.
