The last year or so has been tough going for growth stocks, but the last few months have been especially brutal. With the Federal Reserve poised to start hiking interest rates, the market's appetite for fast-growing companies has completely soured. Many stocks have crashed like it's the 2000 dot-com bubble bursting all over again.
That doesn't mean these investments are toast, though. On the contrary, high-quality, fast-growing businesses look downright cheap now, considering their long-term prospects. Three that look like especially good values right now are Shopify (SHOP 0.23%), Applied Materials (AMAT -2.34%), and Doximity (DOCS -0.77%).
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Shopify: A top democratizer of e-commerce
The Great Resignation continues to hit corporate America hard. In Jan. 2022, 4.3 million people quit their jobs (the record monthly number was 4.5 million from Nov. 2021), and many of these folks are starting their own businesses. According to U.S. Census Bureau data, new business applications continue at a near-record pace.
This isn't simply a product of employee frustration being taken out on their employers. Internet technology has reached a point where it's easier than ever for many people to start their own gig. Shopify has been a massive player in this space with its suite of software to help small businesses and aspiring entrepreneurs manage all aspects of an e-commerce operation.
As the effects of the pandemic wind down, Shopify's growth trajectory is slowing. But its official (albeit nonspecific) guidance for 2022 is quite noteworthy: Revenue growth is expected to slow from the 57% rate logged in 2021, but it will continue to handily outpace the double-digit percentage growth of the e-commerce market overall.
As of this writing, Shopify stock is down over 70% from its all-time high and has given back all of its gains since the pandemic started. That's right: Even though the e-commerce trend accelerated over the last two years, a simple look at Shopify stock would imply the company has coughed up all of its progress in helping the world bring businesses online -- except the exact opposite has happened. The company is stronger than ever and nowhere close to being done innovating on behalf of its users.
Initiatives to watch in the next couple of years include Shopify's work on its Fulfillment Network to help small businesses provide the same kind of order-delivery services that helped make Amazon a success. Other more niche capabilities include a platform to help businesses sell NFTs directly to customers.
And all this will cost money, which means the 24 times trailing 12-month price-to-earnings (P/E) ratio is a little deceiving. Basically, based on forward profit estimates, this isn't exactly a cheap stock (it trades for 97 times one-year forward earnings estimates).
Nevertheless, Shopify has proven it can be highly profitable, but it's choosing to aggressively invest those profits to promote further expansion -- both for itself and for the millions of small businesses that have grown to rely on its services. I'm a buyer and rooting for Shopify and the democratization of the retail industry.
Applied Materials: New chip equipment for a new era of chip manufacturing
The semiconductor industry is booming right now because of a global shortage of chips. The pandemic and supply chain issues are only partly to blame. These tiny but mighty building blocks of computing technology are undergoing a revolution as they find themselves in everything from cars to home appliances to industrial equipment. Annual industry sales totaled $556 billion last year, and some outlooks (including that of Intel CEO Pat Gelsinger) say that figure will reach $1 trillion by the end of this decade.
A lot more chips will need to be manufactured every year to accommodate this secular growth trend, but this explosion in chip manufacturing will be fueled by companies like Applied Materials (AMAT from here on). You see, AMAT -- along with peers like Lam Research and ASML Holdings -- dominates the field when it comes to developing and selling the machines used to fabricate chips. As chip manufacturers gear up to increase their production capacities and countries worldwide look to bring some production closer to home to withstand future supply disruptions, AMAT is likely to be a big winner.
In fact, management said on the last earnings call they believe global fab equipment spending could reach $100 billion in 2022, up from the roughly $65 billion in 2021 and the previous record of about $60 billion back in 2018 (before the U.S.-China trade war started to take a toll on the industry).
Granted, as this is a form of manufacturing, AMAT's business is likely to be cyclical going forward. Sales and profits will ebb and flow as customer demand for equipment changes each year depending on the construction/expansion of facilities. Nevertheless, the company expects strong double-digit percentage revenue growth this year and another year of growth in 2023, based on initial planning from its chip fab partners. After getting pummeled as of late, the stock trades for just 18 times trailing 12-month free cash flow and doles out nearly all of its free cash flow every year via dividends and share repurchases.
AMAT looks cheap right now if you're searching for a long-term growth story from the semiconductor industry.
Doximity: Making life easier for medical professionals
Healthcare is one of those industries almost everyone agrees could use a serious makeover. The cost of obtaining care has been rising for years, and healthcare professionals are strapped for time because of an aging U.S. population. Suffice to say, patients and care providers are in need of help.
Computing technology is beginning to shake things up in the medical field, and Doximity is just one example of how that's happening. Think of Doximity as a type of social network app but on steroids. Often compared to Microsoft's LinkedIn, key features keep medical professionals up-to-date on the news, help them stay in touch with other care providers, and provide a marketing platform for the industry.
But this is more than just social interaction. HIPAA (Health Insurance Portability and Accountability Act) is a serious deal, but Doximity allows doctors to find and refer patients in a HIPAA-compliant format. Users can make outbound voice and video calls to patients or send and sign digital documents. And a new feature, physician schedule management, is coming via Doximity's acquisition of small software provider Amion.
Telemedicine -- care provided in a virtual format via phone or web-based video -- isn't going away as the pandemic winds down. Doximity is emerging not only as a capable solution but also as an intriguing growth story. Though the stock's first year since its initial public offering (IPO) in summer 2021 has been tenuous (shares are down over 60% from their all-time high and back to where they made their public debut), financial results have been fantastic. Revenue grew 78% to $250 million through the nine months ended Dec. 31, 2021, and free cash flow was $76 million (good for a 30% free-cash-flow margin).
That makes Doximity a rare company that's generating both rapid sales growth and very healthy profit margins. After waiting on the sidelines since the IPO last June, I'm ready to pounce. Shares trade for a premium 66 times trailing 12-month free cash flow, but that could prove to be quite a bargain if the company continues to expand at the rate it has been for a few more years.
