After thriving for more than a decade in a near-zero interest rate environment, growth stocks are getting hammered now that the Federal Reserve has signaled multiple rate hikes in 2022. Shares of businesses in a high growth phase have been sinking because nobody knows how severely to discount their future cash flows yet.
Interest rate uncertainty is enough to batter growth stocks on its own, but this isn't the only weight on the minds of investors right now. COVID-related lockdowns in China have disrupted supply chains, and the lack of goods normally produced there keeps fueling inflation. And even without runaway inflation, Europe is teetering on the brink of a severe economic downturn caused by Russia's invasion of Ukraine.
Image source: Getty Images.
A perfect storm is pushing down shares of risky high-growth businesses, but it probably can't stop companies like Doximity (DOCS +1.90%), Adobe (ADBE 1.52%), and Roku (ROKU +3.86%) from dominating their niche industries. Here's why these are the stocks I want to buy if the overall market tanks this month.
1. Doximity
This is a social network for medical professionals, a demographic that hospitals, drugmakers, and medical device manufacturers are eager to reach with targeted advertisements. In addition to serving lucrative advertisers, Doximity also owns one of the most popular telehealth services, the Doximity Dialer, which allows physicians to use their personal smartphone to call patients without revealing that phone's number.
NYSE: DOCS
Key Data Points
During the company's fiscal fourth quarter, ended March 31, Doximity acquired Amion.com, a business that powers more than 200,000 physician schedules. Instead of waiting for a hospital information desk to tell the whole hospital that a physician is trying to page the cardiologist on call, anyone with the Doximity app can look up a hospital's on-call schedule and contact the appropriate physician directly.
The business is growing by leaps and bounds, but you wouldn't know it by looking at the company's stock chart. Despite an operation firing on all cylinders, shares of the company have fallen to around 65% below the peak they reached last September.
Revenue rose 41% year over year during the company's fiscal fourth quarter. On the bottom line, net income soared 71% year over year to a healthy $36.7 million. As the go-to provider for simple telehealth solutions and physician scheduling, this company is seeing its growth story just getting started.
2. Adobe
In our digital age, consumer-facing businesses that don't create an enjoyable digital experience are in danger of disappearing from the minds of their customers. The vast majority of artists creating said experiences work with subscription-based products from Adobe, such as Photoshop and Illustrator.
NASDAQ: ADBE
Key Data Points
Adobe's dominance in the digital art space is hard to overstate. Enlyft, a marketing consultant, recently checked the web and found nearly 700,000 businesses using some form of software for graphics and photo editing. A whopping 87% of those businesses used Adobe products.
Being the de facto software provider for creative professionals is highly profitable. Cash flows from operations that reached $1.8 billion in the first quarter worked out to an impressive 41.5% of total revenue during the period.
In addition to maintaining a competitive edge for its creative suite, Adobe is using its massive cash flows to gain a share of the document-handling industry. First-quarter revenue from its Document Cloud segment rose 17% year over year to $562 million.
I'd happily buy this stock on the dips, but it's already trading at an attractive price. At the moment, you can buy shares of Adobe for just 30.5 times forward earnings expectations. That's a modest multiple for a highly profitable company with durable competitive advantages in a rapidly growing industry.
3. Roku
Netflix gets a lot of attention, but Roku is still the leading streaming platform in the U.S. by hours streamed. During the first quarter, hours streamed rose 14% year over year to 20.9 billion. That's all the more impressive when you consider Americans spent significantly less time at home during the most recent quarter than they did a year earlier.
NASDAQ: ROKU
Key Data Points
Despite the company's strong operational performance, the stock price has been hammered down to about 80% below the all-time high it set just last summer. In addition to a tough period for year-over-year comparisons, manufacturing Roku-enabled televisions and streaming sticks has gotten expensive due to supply chain constraints.
While Roku has been absorbing minor losses on manufacturing, gaining new active accounts is worth the investment. Advertisers are in the middle of a major shift from broadcast media to ad-supported video on demand (AVoD). We can see more advertisers are competing for available ad space on Roku because revenue per user soared 34% year over year in the first quarter to a healthy $42.91 annually.
Now that Shanghai is mostly open for business again, the supply chain constraints that have been driving up manufacturing costs will probably recede. With plenty of advertisers still migrating from cable television, investors can look forward to strong profit growth from Roku in the quarters to come.
