The stock market has been in sell-off mode this year amid rising inflation and the Federal Reserve's aggressive rate hikes, and things could get worse following terrible earnings reports from big technology companies such as Microsoft, Meta Platforms, and Amazon, among others.
But investors will have an opportunity to buy some fast-growing companies at attractive valuations if the stock market sell-off intensifies. Twilio (TWLO -0.55%), Taiwan Semiconductor Manufacturing (TSM -4.86%), and ASML Holding (ASML -2.05%) are three growth stocks investors can consider buying if the stock market heads lower.
1. Twilio
Twilio stock has already taken a big beating on the market this year, dropping over 71%. As a result, the stock is now trading around just 4 times sales, which is a big discount to its five-year average price-to-sales ratio of 16.
So, the cloud communications specialist already looks like an enticing bet, and it could become a steal if the stock drops further in case of a sell-off.
It would make a lot of sense to buy Twilio stock hand over fist given its outstanding growth.
TWLO Revenue (TTM) data by YCharts
Analysts anticipate 36% revenue growth from Twilio in 2022 to $3.86 billion. The company is expected to sustain its eye-popping growth, which is evident from the following chart.
TWLO Revenue Estimates for Current Fiscal Year data by YCharts
What's more, its earnings could grow at 155% annually for the next five years as per consensus estimates. So, Twilio is expected to remain a fast-growing company for a long time, which isn't surprising considering the market it serves.
At its last investor day, held in October 2020, Twilio said that it was sitting on an addressable market worth $62 billion. That addressable opportunity is expected to expand to $87 billion by next year. Twilio's addressable market growth will be driven by the growing demand for its application programming interfaces (APIs) -- which help companies connect with their customers through text, voice, email, or other channels, along with an increase in the adoption of contact-center-as-a-service and email marketing campaigns.
Twilio was the leader in the communications-platform-as-a-service market last year with a share of more than 50%, which explains why the company is expected to register an impressive growth rate for a long time. Twilio looks like a value play right now and a stock market sell-off could help investors get a sweeter deal on this cloud play.
2. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing Company, popularly known as TSMC, is the world's largest semiconductor foundry that makes chips for some of the leading companies across the globe. Buying the stock seems like a no-brainer right now considering its valuation and outstanding growth.
TSMC reported a 36% year-over-year jump in Q3 revenue to $20.2 billion. The Taiwanese company's gross margin expanded to 60.4% from 51.3% in the year-ago period. As a result, TSMC's earnings jumped to $1.79 per share from $1.08 per share in the year-ago period. The company benefited from the robust demand for chips used in smartphones, cars, and the Internet of Things last quarter, and its guidance is an indication of better things to come.
TSMC anticipates $20.3 billion in revenue in the fourth quarter, an increase of 29% over the year-ago period. Another round of margin expansion is in the cards this quarter as management expects the operating margin to reach 50% this quarter from 41.7% in the prior-year period.
More importantly, TSMC's long-term forecast suggests that the company is built for impressive long-term growth, with CEO C.C. Wei saying on the October conference call, "We expect strong demand for our leading node technologies, driven by both smartphone and [high performance computing] applications to fuel our long-term revenue growth of 15% to 20% CAGR over the next several years in U.S. dollar terms."
TSMC can live up to its long-term revenue growth forecast as the demand for chips manufactured using smaller nodes is going up. Last quarter, 54% of TSMC's revenue came from chips made using the 7 nanometer (nm) and the 5 nm processes. The company witnessed a consistent increase in revenue from chips manufactured on 7 nm or smaller nodes since the beginning of 2020. That's not surprising as chips built on a smaller node are more powerful and power efficient compared to those built on larger nodes.
The demand for chips based on smaller nodes is increasing thanks to applications such as the metaverse, where faster computing is required along with low power consumption. Moreover, TSMC is one of the best-placed companies to take advantage of the secular growth in semiconductor demand. This explains why its earnings are expected to clock a compound annual growth rate of 21% for the next five years.
With TSMC stock trading at 13.5 times trailing earnings, investors have an opportunity to buy this semiconductor giant at a cheaper level in case of a market sell-off, which is an opportunity they may not want to miss given its solid prospects.
3. ASML Holding
ASML Holding put any concerns of a slowdown in semiconductor demand to rest when it released its second-quarter results on Oct. 19. The company's revenue was up 10% year over year to 5.78 billion euros, but the Q4 outlook indicates that it is about to step on the gas. ASML anticipates revenue between 6.1 billion euros and 6.6 billion euros in the current quarter, which would be a 27% increase over the same quarter a year ago.
ASML's fourth-quarter acceleration can be attributed to easing supply chain constraints that are allowing it to fulfill more orders. The good part is that the demand for the company's machines that enable semiconductor foundries to make chips remains strong.
This was evident from new orders worth 8.9 billion euros that ASML received in the third quarter. For comparison, ASML received 6.2 billion euros worth of orders in the third quarter of 2021.
The Dutch semiconductor giant now has a massive backlog of more than 38 billion euros. That's substantially larger than the company's 2022 revenue forecast of 21.1 billion euros, which would be a 13% jump over 2021. As such, don't be surprised to see ASML's growth pick up in 2023. Analysts are predicting 21% annual revenue growth from the company next year, a pace that it could sustain beyond 2023 given its massive backlog.
Another growth factor is that demand for the extreme ultraviolet lithography equipment that ASML sells is estimated to increase at an annual pace of 21% through 2029, according to Future Market Insights.
All of this indicates that ASML is built for solid long-term growth. The semiconductor stock is trading at 35 times earnings, which is expensive compared to the Nasdaq-100's multiple of 23. So, investors would have an opportunity to buy ASML stock on the cheap in the case of a stock market sell-off. And, they may not want to miss it as the company looks set to sustain its outstanding growth.
