The last few months have been brutal for growth stocks. In addition to multiple other factors, macroeconomic shifts and disappointing performance from some industry-leading tech names have led to waning investor confidence in companies with forward-looking valuations.
On the other hand, some massive valuation pullbacks have also created opportunities to invest in top technology stocks at big discounts. Read on to see why a panel of Motley Fool contributors identified Zoom Video Communications (ZM 2.36%), Twilio (TWLO 1.04%), and Netflix (NFLX 0.33%) as top buys on the heels of recent market turbulence.
A growing moat in a massive niche
Jason Hall (Zoom): There's an ongoing debate about remote work. Will it be prevalent, or a passing fad? What about businesses using video conferencing to replace in-person meetings with customers? Some think it will replace business travel almost completely; others think that as soon as companies start losing customers, their sales reps will be on the next flight to get in front of decision makers.
Zoom stock has been caught up in this argument for more than a year. After "zooming" to all-time highs in 2020, shares have taken a volatile trip lower. At recent prices, they're down 75% from the all-time high.
But I think the argument, to some degree, ignores the data. Zoom continues to grow its customer count, revenues, and cash flows at an incredible rate. And it's not just signing up companies for video services; Zoom Phone has become a huge success, as companies look to Zoom to provide a comprehensive platform for their communications.
Today, Zoom shares trade for 11 times trailing sales. That's cheaper than they've ever been, even before the coronavirus pandemic sent its shares rocketing higher. We may never see Zoom's revenues grow 50% per year again, but I do think 25%+ growth over the next decade is possible. And that makes Zoom a growth stock that's dirt cheap at today's price.
Powering communications and user engagement trends
Keith Noonan (Twilio): It's been a tough year for Twilio, and shareholders may feel like they haven't seen good news in a while. The communications technologies stock crashed late in October after the company's third-quarter results arrived with underwhelming guidance, and its valuation has continued to slide amid market aversion to companies with growth-dependent valuations.
Twilio's software makes it easy for clients to set up automated customer service channels, send crucial status updates, and react to user demand, and there's a promising long-term expansion outlook here despite what recent trading might suggest. The communications specialist's share price is now down roughly 58% from the high it hit last February, and I think there's an opportunity for long-term investors to see strong performance from the stock at current prices.
Twilio's software helps power mobile applications for industry leaders, including Uber, Airbnb, Nike, and Shopify. The company has a base of more than 250,000 customers, and the combination of rising spending per client and new clients joining sets the stage for the business to deliver more big sales growth over the long term. And while the business isn't currently profitable, Twilio's strong balance sheet means the company should have plenty of flexibility for acquisitions and should have no problem funding operations without taking on debt.
Mobile software services will play a key role in economic growth through the next decade and beyond, and Twilio's top-rated services land-and-expand approach could help it secure long-term leadership in valuable categories.
Investors have an opportunity to buy this streaming content pioneer at a discount
Parkev Tatevosian (Netflix): This streaming content pioneer is experiencing a rocky start to 2022. As of this writing, the stock is down 32% for the year and trading near its 52-week low of $360. That's a significant fall from grace for Netflix, which at one point was trading as high as $688 in the last year. That said, it may be an excellent opportunity to buy this outstanding growth stock at a lower price. Admittedly, Netflix's subscriber growth may be a bit choppy in the near term, but its long-run trajectory is higher.
Subscribers are the lifeblood of the company. It's what propels the flywheel. Subscribers generate revenue, which Netflix can then spend on content, which attracts more subscribers, and so on. In that regard, Netflix's revenue in 2021 totaled $29.7 billion. That was $4.7 billion more than in 2020.
Importantly, subscriber and revenue growth is flowing to profitability. From 2017 to 2021, Netflix's operating profit margin has expanded from 7.2% to 20.9%. Its business model is inherently scalable. Regardless of how many people watch, it costs Netflix nearly the same to produce content.
As of Dec. 31, Netflix boasted 222 million subscribers, a 9% increase from the same time the year before. This is the primary reason investors are getting a discount on Netflix stock right now -- not because of how many subs it has, but because of how many it forecasts for the next quarter. Management guided investors to look for sub growth of 2.5 million in the first quarter. However, in the last five years, Netflix has averaged sub growth of 8.4 million in Q1. The lower-than-average forecast sent Netflix stock crashing after it announced the figures on Jan. 20.
Still, Netflix keeps growing subscribers, revenue, and operating profits. The recent sell-off means investors can buy this excellent growth stock near 52-week lows, a bargain that may not last very long.