Over the past few months, rising inflation and the threat of higher interest rates have sparked a grueling rotation away from high-growth stocks. Many of the market's top-performing stocks were abruptly cut in half as investors fled to value stocks and more conservative investments.
However, prematurely selling your top growth stocks could ultimately be a much more costly decision than simply holding on through the volatility. So today, let's examine three breakout growth stocks you should consider buying during this painful downturn -- and why they might generate much bigger gains after the macroeconomic headwinds wane.
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1. Unity Software
Unity Software's (U 3.50%) game development engine simplifies the creation of cross-platform games for mobile devices, consoles, and PCs. Roughly half of the world's games across those platforms were created with Unity.
Unity locks in its developers with additional tools for in-app advertising, in-app payments, analytics, and other services. It also provides additional development tools for the mixed reality, media, and non-gaming markets.
Unity's revenue rose 43% in 2020 and 44% in 2021, and it anticipates 34%-36% growth in 2022. It also expects to maintain an annual revenue growth rate of at least 30% for the foreseeable future.
Unity isn't profitable by either generally accepted accounting principles (GAAP) or non-GAAP metrics yet, but its gross margins are expanding and it expects to break even on a non-GAAP basis in 2023.
Unity's stock isn't cheap at 23 times this year's sales, but it provides an essential platform for the development of video games and other digital experiences. Unity's early mover advantage in these growing markets, the increasing stickiness of its ecosystem, and confident long-term growth targets all suggest it could gradually evolve into the next Adobe.
2. Twilio
Twilio's (TWLO 1.57%) cloud-based communications platform handles text messages, calls, videos, and other content for mobile apps. Instead of building those features from scratch -- which can be time-consuming, buggy, and difficult to scale as an app's audience grows -- developers can simply outsource those services to Twilio by adding a few lines of code.
Twilio served 256,000 active accounts in its latest quarter, and its major customers include Lyft, Airbnb, eBay, and the American Red Cross.
Twilio's revenue rose 75% in 2019, 55% in 2020, and 61% in 2021. Like Unity, Twilio believes it can grow its annual revenue by at least 30% over the next few years. But it also isn't profitable by GAAP measures yet, and its non-GAAP profitability has been bumpy over the past few years.
However, Twilio expects to achieve non-GAAP operating profitability by 2023, and it believes its gross margin -- which dipped to 51% in 2021 -- will eventually surpass 60% over the long term as economies of scale kick in.
Twilio enjoys a first-mover's advantage in its niche market, but its stock only trades at about 10 times this year's sales -- making it much cheaper than Unity and many other high-growth tech stocks.
3. Veeva Systems
Veeva Systems (VEEV 1.16%) provides cloud-based customer relationship management (CRM), data storage, and analytics services for over 1,000 life science companies -- including pharmaceutical giants like GlaxoSmithKline, AstraZeneca, and Merck.
Veeva's CRM platform helps those companies manage their sales teams, while its other cloud-based services help them store their own data and track the latest industry regulations and clinical trials. Veeva doesn't face any meaningful competitors in this niche market, and intense competition between life science companies fuels its long-term growth.
Veeva's revenue rose 28% in fiscal 2020 and increased 33% in fiscal 2021, and it expects 26% growth in fiscal 2022 (which ended last month). It's also firmly profitable by GAAP and non-GAAP measures, and its subscription-based gross margins have consistently remained in the mid-80s.
Like Unity and Twilio, Veeva also has a rosy outlook for the future. It expects to generate $3 billion in annual revenue by calendar year 2025 (which includes most of fiscal 2026) -- which would represent a big jump from its estimated revenue of $1.84 billion in fiscal 2022.
Veeva's stock isn't cheap at 57 times forward earnings and 17 times next year's sales, but its stable growth rates, prisoner-taking ecosystem, and dominance of its niche market all justify those higher valuations.
