Conditions in the market might not seem so bad to you right now if you largely own broad-based index funds, but there has been a ton of pain for many investors over the past six to 12 months. Specifically, shareholders in high-growth companies that have yet to start generating profits have seen their portfolios plummet. Within that section of the market, many companies' share prices are down by 50% or more, even though the S&P 500 is still up by more than 10% in the past year.
For those investors who are willing to potentially endure some more near-term pain en route to a longer-term profit, now looks like a great time to open positions in some of these beaten-down stocks. Here are three top growth stocks to buy at a discount in March.
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1. Spotify
Spotify (SPOT -4.62%), the leading music and audio streaming service worldwide, is down by 56% in the last 12 months. The company put out relatively weak guidance for the current quarter, and has been embroiled in a controversy around the host of its No. 1 podcast -- The Joe Rogan Experience. Both of these items likely contributed to the stock's poor performance recently. While investors should keep an eye on these issues, I think that this price plunge provides a buying opportunity for anyone looking to be a long-term shareholder of Spotify.
This company could be a good investment from here for a few reasons. First, its core music streaming business has a long runway for growth. At the end of 2021, Spotify had 180 million subscribers to its premium, ad-free music streaming service and an estimated 31% market share worldwide. Premium subscribership grew by 16% year over year in Q4, and it has consistently grown at a rate in the 15% to 30% range over the last five years. With analysts expecting the streaming audio industry to continue growing at a rate of 15% or more annually over the next decade, Spotify should be able to continue growing its premium business at a healthy rate simply by maintaining its current market share.
Spotify's also making multiple audio-focused investments, particularly in podcasts and podcast advertising. It has bought out several podcast distribution platforms (Anchor, Megaphone, Whooshkaa), licensed top shows like The Joe Rogan Experience and Armchair Expert, and acquired a few podcast studios (Parcast, the Ringer, and Gimlet). All these deals have helped Spotify grow its recently launched audio advertising marketplace -- the Spotify Audience Network (SPAN) -- to monetize its rapidly growing inventory of podcast content. This has helped accelerate Spotify's overall advertising business, which grew 40% year over year last quarter and now provides 15% of overall revenue.
At a market cap of $27 billion and trading at a price-to-gross-profit ratio (P/GP) of 8.8, which is right around the market average, Spotify stock looks like a great buy here given its growth potential over the next decade and beyond.
2. Coupang
Coupang (CPNG -1.30%) is a leading e-commerce retailer in South Korea. It went public a little less than a year ago, and its stock is down 48% since then. Similar to Amazon, Coupang runs a vertically integrated e-commerce operation with its own logistics, warehouse, and delivery network that helps give it a competitive advantage in terms of fast delivery times and customer satisfaction. In fact, given the population density of South Korea, it can deliver the majority of orders within one day, and for orders placed before midnight, a large fraction get fulfilled by 7 a.m. the following morning.
In Q4 2021, Coupang grew revenue 34% year over year to $5.1 billion, which shows the scale at which it's already operating. Gross profit only came in at $806 million, a gross margin of 17%, which is weak. However, Coupang says that is because of the heavy investments it has made to meet accelerating demand over the last few years. (E-commerce growth, as we all know, accelerated during the pandemic.) Management forecasts that gross margins will expand to the 27%-to-32% range once the business matures over the next few years.
On top of the core e-commerce business, Coupang is investing heavily in grocery delivery, food delivery, advertising services, a Shopify-like merchant services business, and its fintech subsidiary, Coupang Pay. With a huge market opportunity to go after (South Korea is already the third-largest e-commerce market worldwide) and tons of ancillary businesses that can drive growth, Coupang has the chance to be a great long-term compounder for investors.
3. Callaway
You might be surprised to see Callaway (MODG 1.23%) -- a company best-known for manufacturing golf clubs -- on a list of high-growth stocks. But it's more than just a seller of drivers, putters, and golf balls, thanks to its 2021 acquisition of Topgolf. The mega-driving range, golf tracking technology, and entertainment company is the key reason why Callaway could turn into a high-growth stock over the next five to 10 years.
In Q4, Topgolf brought in $336 million in revenue -- 47% of Callaway's total. Same-store sales were up 6% compared to Q4 2019, and the business opened nine new venues throughout the year. The highlight for me is that its 6% same-store sales growth came in a quarter when the business was still facing headwinds from the COVID-19 pandemic compared to 2019 when the coronavirus hadn't yet reached the United States. If and when people largely return to their pre-pandemic behaviors, it is likely that Topgolf's same-store sales growth will accelerate over 2019 levels as more people come back to eat, drink, and hit golf balls.
Topgolf expects to open around 10 new venues next year, and management thinks that the worldwide market could support 450 in total. Given that there are fewer than 100 Topgolf venues operational right now, it would appear that there's ample opportunity for it to expand its footprint over the next decade.
In addition to its own venues, Topgolf licenses its Toptracer tracking technology to other driving ranges. It expects to add 8,000 driving-range bays to this high-margin business in 2022, and management thinks there is an opportunity for north of 150,000 bays to have Toptracer technology installed once the business scales.
Callaway has a market cap of $4.4 billion combined with $600 million in net debt, giving it a $5 billion enterprise value. But the Topgolf segment alone could be worth much more than that 10 years from now, so even ignoring the golf equipment and apparel business, this looks like a promising stock to buy now.
