The past several months have been tough on investors in growth and technology companies. Many stocks have been down more than 50% from their highs. The stock market goes in cycles, and growth stocks will likely heat up again at some point.
However, not all stocks will recover -- times like this can separate poor-quality companies from the actual winners. But how do you know which stocks are likely to rebound? I like to look for companies growing revenue while generating free cash flow (FCF). Here are three charts highlighting companies with these ingredients for long-term success.
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1. Palantir Technologies
Data analytics software company Palantir Technologies (PLTR 1.38%) develops software applications on its Gotham and Foundry platforms for government and commercial customers. Its software integrates and analyzes data, helping users make actionable decisions, find trends, or optimize operations.
You can see in the above chart that revenue has continued to grow since the company went public, despite the share price of the stock falling. Revenue grew 41% year over year in 2021 to $1.5 billion. Meanwhile, the company's free cash flow is growing dramatically, increasing from negative $271 million in 2020 to positive $424 million in 2021.
2. Monday.com
Software company Monday.com (MNDY 1.26%) sells its cloud-based work "operating system" software that lets customers design custom work applications with little to no coding or programming. Monday.com operates a software-as-a-service (SaaS) business model, which results in recurring revenue for the company as more users come onto the platform.
Monday.com has seen its stock fall more than 40% since the beginning of 2022. The business has grown revenue an average of 99% annually from 2019 through 2021. The company is also generating positive FCF; it did $10 million in FCF in 2021, which should increase as revenue growth outpaces expenses thanks to Monday.com's 90% gross profit margins.
3. Fiverr International
Marketplace company Fiverr International (FVRR 1.49%) operates a platform where people sell freelancing services for a wide range of skills. This might be graphic design, copywriting, or virtually anything else. The stock became very popular with investors during COVID-19 lockdowns when remote work and freelancing became more mainstream.
The stock has been down more than 30% since the beginning of the year and a whopping 70% over the past 12 months. Management is guiding for 25% to 27% revenue growth in 2022, so Fiverr is still growing at a healthy pace. Its free cash flow turned positive during the pandemic and was $35 million in 2021. I expect this to increase as revenue grows.
Investor takeaway
These three companies are all growing their top line at strong growth rates and generating positive free cash flow, which puts them on a solid path to profitability on the bottom line. Growing cash-flow-positive businesses like these are likely to succeed if the underlying businesses keep performing.
I know it can be disconcerting to see the stocks you own go down week after week, but the fundamentals almost always determine what a stock does over the long term. If you can find companies like these three with strong fundamentals, you'll likely find companies poised to become winners in the next bull market.
