Plenty of growth stocks soared in 2020 and 2021, but many of those same stocks have seen a big reversal in 2022. The Nasdaq-100 index is down 26% year-to-date, with many growth stocks down 50% or more just through the first half of 2022. For short-term traders, this has been a time of worry and sell-offs. But for long-term investors, it's been a great time to pick up stock in some strong companies while they trade on the cheap.
When searching for growth stocks to buy, you'll want to start by looking for companies that have huge industry tailwinds and large market opportunities to go after. Add in an experienced management team, and you just might have a recipe for sustained double-digit revenue growth over many years.
Let's take a closer look at two hot growth stocks that have the right ingredients for this recipe and see why they are a buy in 2022 and a great hold for a long time.
1. Spotify
Spotify (SPOT 2.42%) is the world's leading audio streaming service outside of China. The company offers a vast library of audio content including its well-known ad-free music subscription service and a growing catalog of podcasts. According to CEO Daniel Ek, Spotify's goal is to become the dominant audio digital audio service around the globe, serving listeners of music, podcasts, audiobooks, and more.
In Q1 of 2022, Spotify had 422 million monthly active users (MAUs) and 182 million premium subscribers to its ad-free music listening service. Total MAUs are growing 19% year over year and have grown at a solid double-digit rate since the company went public around five years ago. This consistent growth has driven Spotify's financials to new heights, with revenue growing at least 10% year over year in every quarter for the past five years. With a goal of eventually reaching 1 billion MAUs, Spotify should be able to continue this double-digit revenue growth for the foreseeable future. For example, third-party analysts expect the music streaming market to grow at a 15% compound growth rate through 2030. Spotify should benefit from this tailwind as the industry leader.
As of this writing, Spotify's stock trades at a market cap of $20 billion. Over the last 12 months, it has generated $11.8 billion in revenue, and over the long term, the company thinks it can achieve operating margins of 10%. (Due to large royalty payments, the company has structurally low gross margins, and therefore will have a low operating margin.) Applying a 10% operating margin to Spotify's trailing revenue, the company would be doing $1.18 billion in operating income, which would give the stock a trailing price-to-operating income (P/OI) of 17.
Investors should note that Spotify does not generate much in profits right now. But if the company can continue growing its top line at a double-digit rate and eventually reach an operating margin of 10%, today's price seems much too low for the leader in audio streaming.
2. Revolve Group
Revolve Group (RVLV -3.28%) is an online fashion retailer that caters to younger generations, specifically women, and focuses on selling social-event items like dresses, fancy shoes, etc. The company has a unique strategy of using social media influencers to promote its products, building a funnel of potential new customers from places like Meta Platforms' Instagram, ByteDance's TikTok, and Snap's Snapchat. On top of this, it has a big presence at different events like Coachella, where young people can see Revolve's brand and other peers wearing its items. This strategy has made Revolve one of the top online retailers for young women.
SPOT Revenue (Quarterly YoY Growth) data by YCharts
Aside from the heart of the pandemic, Revolve Group -- like Spotify -- has grown its revenue at a double-digit rate since it went public. The online fashion industry is large and growing quickly. Third parties valued online fashion sales at $760 billion in 2021, and it is projected to grow to $1 trillion in annual spending by 2025. Revolve Group should be able to ride this wave with its influencer-based marketing model.
Revolve Group has 2 million active customers, which was up 38% year over year at the end of Q1. With tens of millions of women shopping online just in the United States, Revolve Group clearly has tons of room to grow its awareness with its target audience. Plus the company is already quite profitable, generating $80 million in free cash flow over the past 12 months. At a market cap of $2 billion, that gives the stock a price-to-free cash flow (P/FCF) of 25. While not dirt-cheap, given the huge market opportunity Revolve has ahead of it and its proven operating model, I think investors can do well owning this stock if they hold it for the long term.
