The S&P 500 officially entered a bear market in June, and a fresh bull market probably won't start as long as interest rates keep rising. As a result, many investors are reluctant to buy high-growth stocks, which trade at premium valuations, even if their growth rates are attractive and their fundamentals are sound.
That caution is warranted, but investors will likely miss out on some big long-term gains if they indiscriminately shun all growth stocks. So for now, investors should identify the high-growth stocks they'd be willing to buy if a severe market crash whittles their valuations down to more reasonable levels. I believe Zscaler (ZS 0.25%), Cloudflare (NET 2.11%), and Airbnb (ABNB 6.87%) belong on that post-crash shopping list. Let's take a closer look at these three unstoppable growth stocks.
Zscaler provides cloud-native cybersecurity services that eliminate the usage of on-site appliances -- which can be challenging to scale as an organization expands. Instead of providing a wide range of services the way other cloud-native cybersecurity companies like CrowdStrike Holdings do, Zscaler specializes in "zero trust" services, which treat everyone as a potential threat.
The market's demand for its zero trust services exploded over the past four years. Zscaler went public in 2018, and its annual revenue skyrocketed from $190 million in fiscal 2018 to $1.01 billion in fiscal 2022 (which ended this July), representing a compound annual growth rate (CAGR) of 55%. It expects its revenue to rise 37% to 38% in fiscal 2023.
Zscaler more than doubled its customer base during those four years, and its platform protected 34 million users at the end of fiscal 2022. It expects that figure to rise to 200 million over the long term. Zscaler is still unprofitable under generally accepted accounting principles (GAAP), mainly due to its hefty stock-based compensation expenses, but it's already profitable on an adjusted basis.
Zscaler's growth rates are impressive, but its stock isn't cheap at 18 times this year's sales. Therefore, a market crash might just create a much more attractive entry point for this high-flying cybersecurity stock.
Cloudflare's content delivery network (CDN) accelerates the delivery of digital content from websites to their visitors. It also shields websites from bots and distributed denial-of-service (DDoS) attacks, and it often calls itself a "water filtration system" for the modern internet.
Cloudflare grew like a weed since its initial public offering in 2019. Its annual revenue rose from $193 million in 2018 to $654 million in 2021, a CAGR of 50%. It expects its revenue to grow another 47% to 48% this year, since companies will still need to protect their websites from malicious bots and attackers regardless of the macro headwinds. By comparison, its smaller rival Fastly expects revenue to rise just 17% to 20% this year.
Cloudflare's platform is also sticky. Its dollar-based net retention rate consistently stayed above 120% over the past year, and the company believes that key metric could exceed 130% over the long term.
Cloudflare isn't profitable on a GAAP basis, and its non-GAAP profits remain inconsistent. However, those losses could narrow as it scales up its business and reins in its stock-based compensation expenses. Cloudflare's growth rates are impressive, but its stock isn't cheap at 22 times this year's sales. Therefore, it could become a lot more appealing if a market meltdown finally compresses that premium valuation.
Airbnb is synonymous with short-term rentals. Its business model is also well insulated from inflation since budget-conscious travelers will likely book cheaper accommodations on Airbnb instead of staying at pricier hotels, while hosts will continue to rent out their properties to generate more passive income.
Airbnb's revenue fell 30% in 2020 as the pandemic spread. But in 2021, its revenue soared 77% to $6 billion as those headwinds faded and people started to travel again. Its net loss narrowed from $4.6 billion in 2020 to $352 million in 2021. It also generated positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.6 billion in 2021, compared to an adjusted EBITDA loss of $251 million in 2020.
Airbnb currently faces some geopolitical headwinds in Europe, which saw a decline in travel following Russia's invasion of Ukraine. Nonetheless, analysts still expect its revenue to rise 38% to $8.3 billion this year as its adjusted EBITDA increases 70% to $2.7 billion. They also expect it to generate a GAAP net profit of $1.4 billion for the full year.
Airbnb's growth rates look robust, but some investors might still be reluctant to pay 10 times this year's sales for the stock in this tough market. Therefore, a steep pullback could create a better buying opportunity for long-term investors.