This year has not been friendly to growth stocks. Let's face it, 2022 so far has been hugely disappointing for the vast majority of the growth sector. But on the other hand, this environment also creates tremendous opportunities for long-term investors.
The stock market can eventually turn around as macro conditions turn favorable, and the best thing is, long-term investors don't have to time the market perfectly. The March 2020 crash is an ideal example. It looked like the market would never recover for a while, only to see it come screaming back to all-time highs. The following two companies have come down significantly from highs but could produce massive gains in the long run.
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1. Perion Network
Advertising is going digital. As more and more people view media online, like video and connected television (CTV), advertisers must look beyond traditional media. According to eMarketer, CTV advertising spending will increase by over 32% this year from 2021 levels, to $19.1 billion.
In addition, search advertising is a terrific way for advertising to connect with online shoppers who are actively looking to purchase. Perion Network (PERI -0.43%) provides the digital advertising solutions needed by publishers and advertisers.
The company has positioned itself for success through acquisitions, innovative technology, and strong management. The most recent addition, Vidazoo, looks like another success in the making. It will give Perion an end-to-end solution to expand the company's video advertising offerings. Management expects the acquisition to be immediately accretive to earnings.
The company's Undertone division, a previous acquisition, recently launched Shoppable High Impact. This feature allows customers to add products directly from an online advertisement to the retailer's cart with one click. Undertone also offers its SORT technology that helps advertisers target customers without using cookies. These are just two examples of Perion's innovative approach.
Perion stock has gained more than 770% over the last three years, yet it is still not overvalued. The company earned $1.02 per diluted share in net income in 2021 when calculated under generally accepted accounting principles (GAAP). That put its price-to-earnings ratio around 22 on a trailing basis.
The company has no long-term debt and $322 million in cash and equivalents and short-term bank deposits on hand at the end of 2021. This solid balance sheet is a testament to responsible management. Revenue increased 46% in 2021, and the company expects another 30% increase this year.
Data source: Perion Network. Chart by author.
If this sales growth continues and earnings per share (EPS) keep pace, Perion could be making well over $2 per diluted share by 2024, and the stock could double while maintaining its current valuation.
2. PagerDuty
In our digital world, companies can ill afford downtime. This makes it crucial that they have the necessary tools and information to detect and rectify problems. It is even better if the issues can be identified before an outage. This is the role that PagerDuty (PD 1.18%) can play in an organization.
Before starting the company, co-founder Alex Solomon worked for Amazon as a software engineer. These software engineers were on call to rectify issues around the clock, and they were notified via pagers. (Raise your hand if you remember those archaic devices!) This became known as being on "pager duty," as the company is aptly named. The founders saw that there was serious room for improvement in this process. PagerDuty's platform allows organizations to efficiently manage on-call responsibilities, automate responses, provide data analytics, and perform other functions.
PagerDuty stock went on a tear after the pandemic crash. In March 2020, it traded as low as $15 per share before peaking at over $55 in February 2021. It has since given up much of these gains as investors become wary of growth stocks. The company is not yet GAAP profitable, and PagerDuty stock is far from a sure thing; however, the company has massive potential for an investor with the proper risk tolerance.
The number of customers using PagerDuty reached 14,865 at the end of fiscal 2022, with large customers (those providing over $100,000 in annual recurring revenue) up 39% year over year. Since fiscal 2019, the company's sales have had at a compound annual growth rate (CAGR) of 34%. Management is guiding for $360 million to $366 million in revenue this fiscal year, an increase of 29% over the $281 million earned in fiscal 2022. PagerDuty could nearly double its sales, and potentially its stock price, over the next three years if it can maintain a CAGR of 25%.
