With concerns over inflation and higher interest rates, growth stocks have taken it on the chin over the past few months. So is it time to buy these former market darlings? It's hard to say; some of these stocks still don't look traditionally "cheap," and interest rates look as if they will continue to rise.
However, disruptive growth stocks rarely do look cheap. And over the long term, companies with competitive advantages and long growth runways should do well for investors -- perhaps really well. The following three names have each have those key characteristics in spades.
CrowdStrike
Cybersecurity leader CrowdStrike (CRWD 0.14%) has done relatively well compared with other high-growth, profitless growth stocks over the past few months, but it hasn't been spared. It's still down roughly 28% from its highs, despite a good recent run.
CrowdStrike has remained somewhat better off since it's in the mission-critical arena of cybersecurity. Cyberwarfare was already a growing concern, but the Russia-Ukraine conflict has turbocharged it. Last Monday, President Biden warned the private sector that the Russian government could be preparing cyberattacks against critical infrastructure and other U.S. business and government entities.
CrowdStrike just reported an impressive quarter, in which annualized recurring revenue rose 65%, and adjusted (non-GAAP) operating margin expanded to 19%, up from 13% in the prior-year quarter. While the company is making GAAP losses due to stock-based compensation, CrowdStrike is generating lots of free cash flow, so it's in no need of external funding.
The company is really hitting it out of the park on underlying metrics as well: Customer count grew 65%, and CrowdStrike has been successfully cross-selling customers more cybersecurity "modules" as well, leading to nice margin expansion.
CrowdStrike has been so successful due to its innovative endpoint detection and response (EDR) product, which uses a cloud-based software agent that collects and sends back data to CrowdStrike's central Threat Graph. The Threat Graph uses artificial intelligence to get smarter as it racks up more customers and data. That powerful network effect has given CrowdStrike a disruptive leg up on that corner of the cybersecurity market, which it's now leveraging to pick up other services.
One year ago, CrowdStrike bought Humio for its extended detection and response (XDR) capabilities, including fast data processing and analytics. XDR takes a wider view of a company's systems and operations, including unstructured data and applications, not just individual endpoints.
From its torrid growth, it appears CrowdStrike has solidified its position at the head of the class for next-generation network security platforms. Despite a high valuation and potential for near-term pullbacks, CrowdStrike looks like a competitively advantaged company with a long growth runway, making it a solid long-term buy.
MongoDB
Another next-gen disruptor of an essential enterprise function is MongoDB (MDB -2.10%), which is doing to the database industry what CrowdStrike is doing in cybersecurity. Just as CrowdStrike's cloud-and-AI-based model is replacing legacy security solutions, MongoDB's document database architecture handles modern forms of unstructured data better than the row-and-column format of traditional relational databases.
The rapid adoption of this newer database format by app developers is why MongoDB is showing blistering growth. Last quarter, revenue was up 56%, and revenue growth could maintain that rate for some time. That's because Atlas, MongoDB's cloud-based database as a service, rocketed a whopping 85% higher last quarter -- but Atlas makes up just 58% of revenue. As the hypergrowth Atlas offering continues to make up a larger and larger part of the business, MongoDB's revenue growth should keep up a solid pace.
Image source: Getty Images.
While MongoDB's revenue just cleared the $1 billion annualized run rate, management thinks its offerings have a $70 billion-plus market opportunity ahead. Known as the market leader in document databases for modern application developers with that big a market opportunity, MongoDB should do quite well over the long term, despite an expensive-looking price tag today.
MercadoLibre
Finally, Latin American e-commerce and fintech leader MercadoLibre (MELI -1.98%) has a strong leadership position in high-growth markets across Latin America, where e-commerce is still fairly underpenetrated.
MercadoLibre has been growing by leaps and bounds, and is investing to cement its competitive scale advantage. Last quarter, revenue grew 74% to over $2.1 billion, with a nice balance of 67% e-commerce growth and 81% fintech growth. Meanwhile, gross margins expanded 3.2 percentage points to 40%, and operating margins swung from negative 1.9% a year ago to a positive 1.1%.
There are also signs that MercadoLibre's leading position in Latin America is solidifying. Of note, its Mercado Pago payments volume grew a whopping 96.5% in "off-platform" payments, faster than MercadoLibre's "on-platform" payment volume growth of 32.2%. Off-platform payments were also double those of on-platform, showing that Mercado Pago is gaining wide acceptance as a preferred digital payments solution across the economy, not just on MercadoLibre's e-commerce site.
Second, MercadoLibre's heavy investments in logistics appear to be paying off -- 89% of orders go through its own "Logistics by Mercado Envios" platform, ensuring quality and fast delivery. That's up from 77% a year ago. Same-day and next-day orders were 59% of the total, up from 45% a year ago, which is really impressive in emerging markets like Latin America with less-developed infrastructure. Given MercadoLibre's lead in logistics, it would be hard for another e-commerce company to build out its own first-party logistics platform with that kind of scale and similar delivery capabilities.
While third parties do exist and other competitors will remain on the low end, it would be hard for anyone to catch up with MercadoLibre's ecosystem for first-class delivery of high-end items. Shares are still down 39% from the all-time highs set last year, so you might consider investing in MercadoLibre today.
