The start of December brought news that could indicate growth stocks might turn around before 2022 is up. First, U.S. third-quarter GDP growth came in at 2.9% -- a reversal from the negative growth the U.S. experienced in Q1 and Q2. That means the U.S. may have avoided a full-on recession, and growth might return to companies.
Second, Federal Reserve Chairman Jerome Powell stated that the intensity of the rate hikes could ease "as soon as December." If interest rates stabilize, investors may return to growth stocks because the uncertainty of what the final federal funds rate will be is decreasing.
Armed with that information, many investors could return to growth stocks like The Trade Desk (TTD 1.67%) or Cloudflare (NET -0.71%), two names I think could have a phenomenal year in 2023.
The Trade Desk
The Trade Desk's software helps advertisers place their ads in the ideal locations on multiple mediums like podcasts, connected TV, or in the margins of a webpage. Traditionally, tracking cookies helped companies like The Trade Desk pinpoint what type of consumer was viewing an ad space. However, with multiple privacy and security concerns surrounding that product, plus Google's plans to discontinue it, The Trade Desk launched its own product: Unified ID 2.0.
This open-source technology is a much more secure method than cookies and provides better information. Because it links email addresses with anonymous IDs, it allows companies like The Trade Desk to migrate the profile to non-computer ads like connected TV -- The Trade Desk's quickest-growing vertical.
With revenue rising 31% in Q3 to $395 million, The Trade Desk falls under the "growth" label. However, it's also profitable, unlike many other growth names. It posted a $16 million profit in Q3, which would have been even greater if The Trade Desk hadn't handed out a one-time $66 million performance bonus to CEO Jeff Green.
The stock trades at 17 times sales, which is expensive. This valuation would be more of a concern in a strongly rising interest rate environment. However, if the Fed eases its hikes, investors may be more willing to take a position in The Trade Desk stock.
Regardless of what happens between the end of 2022 and throughout 2023, The Trade Desk's market opportunity is massive -- $816 billion was spent globally on ads in 2022. If the company can play a role in placing even a fraction of these ads in front of consumers, The Trade Desk should be a successful investment.
Cloudflare
Hosting a website is expensive. The costly equipment becomes quickly outdated, the IT team needed to maintain it isn't cheap, and the security necessary for it to resist cyberattacks increases the overall cost for a vital service in today's digital world. So why not let someone else take care of that? That's precisely the value proposition that Cloudflare provides.
By hosting your website on Cloudflare's platform, each line of code is placed in more than 275 cities globally. Placing this information closer to the end user speeds up the experience and cannot be replicated unless your company places servers worldwide as Cloudflare did. Additionally, Cloudflare offers best-in-class protection, ensuring even smaller customers are protected to the fullest extent.
This offering seems like a no-brainer for many customers -- which is why Cloudflare's customer count rose 18% to 156,000 in Q3. However, its growth of large customers (those who spend more than $100,000 annually) rose 51% to 1,908, showing that once customers get on the platform, they quickly expand their usage. This expansion is reflected in its net retention rate of 124%, meaning customers spent $124 this quarter for every $100 they spent last year.
Cloudflare isn't profitable, which investors need to pay attention to here. It also has a significant stock-based compensation expense, with Q3's total ringing up to about 22% of revenue. It's also richly valued at 18 times sales. Both items can't be ignored, but when Cloudflare consistently grows its revenue by around 50% each quarter, it gets some grace from investors.
NET Revenue (Quarterly YoY Growth) data by YCharts
Cloudflare is a top stock, and with an appetite for risk potentially returning to the market, look for Cloudflare to lead the way among many of the growth names.
