Year-to-date, the major indexes are down anywhere from 12% to 26%, with the growth-heavy Nasdaq Composite getting hit the hardest. That said, some investors would love to have portfolios down only this much in 2022 -- many top growth stocks have seen their share prices drop 50% or more. But if you focus on buying shares of growing companies, you can rest assured the market will eventually send those stocks higher.
After scouring my personal watch list, I circled three leaders in their respective industries that could be big winners over the next decade. If you have $5,000 to split across three stocks, here's why you might want to buy shares of Alibaba (BABA -0.80%), Unity Software (U +0.31%), and SentinelOne (S -6.67%).
1. Alibaba
Alibaba is one of the world's leading e-commerce and cloud services providers. Its Taobao and Tmall marketplaces reach the largest consumer base in China with 1 billion annual active customers. Alibaba Cloud ranks second behind Amazon worldwide, and No. 1 in China. Its leading position in these growth markets has led to robust growth for shareholders over the last decade, but the weak economy in China and regulatory risks have weighed on the stock's performance over the last year.
NYSE: BABA
Key Data Points
Investing in China is always a wildcard since investors can never know when the next round of scrutiny will surface. The latest crackdown was aimed at antitrust and unfair competition among the large internet platforms in China. Moreover, Alibaba and other Chinese companies have faced the threat of being delisted from U.S. exchanges for not complying with the Holding Foreign Companies Accountable Act.
These risks shouldn't keep a long-term investor from considering the stock at these cheap levels. Alibaba shares trade at just 16 times expected earnings this year, which is much cheaper than other leading tech stocks like Amazon or Microsoft. Alibaba will continue to grow along with e-commerce and cloud spending over the long term. During the pandemic, its retail footprint across China, including Freshippo and Tmall supermarkets, came through in a big way by delivering essential supplies to areas hit with COVID-19.
All said, Alibaba provides important consumer and business services that should continue to produce growing revenue and profits over many years. That's why the stock offers such a great risk-to-reward ratio right now. In the event that the stock is delisted, investors would still be able to trade the stock, but it would likely have to be done in the over-the-counter market, which carries less liquidity than the major exchanges.
Alibaba was trading at a forward price-to-earnings ratio of 30 a year ago. That's the valuation it deserves when there are no dark clouds hanging over it. Investors who buy and hold the stock should earn a market-thumping return over the next 10 years.
2. Unity Software
Unity is a leading software engine that is used to develop more than half of all video games, the largest form of entertainment. This is an industry expected to reach nearly $300 billion in value by 2025. But Unity is also seeing growing non-gaming use cases for its software tools, such as in the medical and construction fields.
NYSE: U
Key Data Points
The market for digital twins, or digital representations of real-world objects, is exploding. Unity's non-gaming business grew 70% year over year in 2021, representing a quarter of its Create Solutions segment, or about 7% of total revenue.
One opportunity Unity is pursuing is expanding its 3D design tools to the mass market so that individuals can create their own content. The company is already putting big money into this with last year's acquisition of Weta Digital for $1.6 billion. Weta's software was used to make classic movies and shows like The Lord of the Rings and Game of Thrones, and now Unity Software wants to unleash those tools to a wider audience.
Unity expects to post lower growth in the near term after one of its advertising tools for mobile game companies experienced a problem with some bad data. But management expects these issues to be short-lived. After falling 77% from its 52-week high, investors can buy the stock at a substantial discount to where this stock could trade in 10 years.
3. SentinelOne
Leading cybersecurity firms are experiencing tremendous demand right now. With more people using devices connected to the cloud, companies are ramping up investment in security -- and it's not just to protect data, but also a cost issue. The average ransomware breach cost companies $4.6 million, and the majority of these attacks occur on endpoint devices, such as desktops, tablets, laptops, and mobile devices.
NYSE: S
Key Data Points
There are several cybersecurity companies posting blistering growth rates on the top line, but you would be hard-pressed to find a faster-growing firm than SentinelOne. Sentinel has more than doubled its revenue over the last year. It grew its customer base by 55% to 7,450 through April, and most importantly it continues to maintain a dollar-based net revenue retention rate of around 130%, meaning that customers are continuing to spend on additional services after signing up.
Customers love Sentinel's advanced technology, which relies on AI-driven models to resolve security threats in real-time, as opposed to alternatives that can take up to an hour. When your data is exposed, every minute counts.
The company's specialty is endpoint security, but it has expanded beyond endpoint devices to every cloud workload. As a result, it has stretched the long-term addressable market for its product to over $50 billion, and its recent growth streak shows it is well on pace to capture a big piece of the market.
The stock has been hammered along with other software-as-a-service stocks this year, but its rapid customer adoption and margin improvement point to growing value for investors. With a market cap of $7.2 billion, this fast-growing mid-cap stock could deliver explosive returns over the next 10 years.
