Macroeconomic conditions have led to brutal trading for growth and tech stocks this year. In fact, the growth-heavy Nasdaq Composite index is down roughly 33% across 2022's trading. Even the less tech-heavy S&P 500 index is down 19% on the year. But investors should remember that it often pays to view things in perspective.
For long-term investors who weathered the storm, even the massive 2008 market crush and subsequent years of trading malaise wound up being manageable, and those who continued to invest in top stocks across the period went on to enjoy fantastic returns thanks to big discounts created by otherwise challenging market conditions. With the knowledge in mind that the market will go on to see better days, Cloudflare (NET 1.44%) and Meta Platforms (META 0.43%) are two growth stocks that are worth buying before the year is out.
Image source: Getty Images.
1. Cloudflare
Cloudflare is a leading provider of protection against distributed denial-of-service (DDoS) attacks, which aim to take websites and applications offline by sending a flood of requests that cause server access to be blocked in response. Cloudflare also provides domain name system (DNS) and content delivery network (CDN) services that make sure that sites and apps are accessible and able to send information quickly around the globe. These are essential services for any business or institution with a significant internet presence, and the importance of its products is helping the company scale rapidly.
Revenue growth of 47% year over year brought the company's sales in the period to $253.9 million, and the company has now surpassed $1 billion in annualized revenue. While tougher economic conditions make it likely that organizations will pull back on project spending and that new businesses will be less likely to crop up in the short term, Cloudflare should be able to continue posting solid sales growth, even if the overall operating backdrop becomes more challenging.
The company's services have mission-critical importance for many websites and applications, and its offerings aren't the kind of things that businesses or institutions can reasonably cut back on without expecting huge drops in performance or service outages.
Cloudflare is providing best-in-class software, and the company should continue to enjoy strong demand in conjunction with the growth of the overall internet. Even better, the company's core software offerings should serve as a strong foundation for branching into new product and service categories. With the stock down roughly 63% year to date and 78% from its high, investors who take a buy-and-hold approach could see stellar returns from the stock.
2. Meta Platforms
Unlike Apple and Alphabet, which control their own mobile-based operating systems, Meta Platforms doesn't actually own the key platforms that are fundamental to its software. The social media giant's apps depend on Apple's iOS and Alphabet's Android software, and that weakness has caused Meta to attempt to build new platforms with virtual reality (VR) and the metaverse. Unfortunately, progress on these initiatives has proceeded at a measured pace, and these costly projects are being undertaken at a time when the company is feeling the squeeze from macroeconomic pressures and changes to user data tracking policies that Apple has implemented on its mobile platform.
Meta Platforms stock has now fallen roughly 65% year to date, and it's down 69% from its lifetime high. In many respects, Meta looks very cheaply valued with its market cap sitting at roughly $304 billion. The company trades at roughly 2.6 times this year's expected sales, less than 13 times expected earnings, and it still has a strong core collection of social media and communications resources.
META PE Ratio (Forward) data by YCharts
Meta's vast resources and willingness to take big risks on new display mediums and software could have incredible payoffs down the line, but investors should approach the stock with the understanding that there will be growing pains. Thankfully, the company's current core business still looks pretty solid, with the tech giant registering an incredible 3.71 billion average monthly active users across Facebook, Instagram, WhatsApp, and other services last quarter. The company is facing substantial monetization headwinds and the pangs of big growth spending, but it would be a mistake to think the social media leader is down for the count.
The challenges at hand mean that this isn't a typical low-risk stock despite its attractive valuation metrics, but it is a stock that presents an attractive risk-reward dynamic for long-term investors. With the stock trading at its lowest levels since 2016, Meta Platforms has significant upside potential if it can become a more efficient organization and deliver better execution -- and the potential for explosive growth if it finds success with its metaverse ambitions.
