The year 2022 will go down in history as a historically bad one for growth stocks. But there's a silver lining. While the growth-heavy Nasdaq Composite index closed out the year down a staggering 33%, and many companies saw even bigger valuation crunches, some top stocks now trade at great prices.
It's impossible to predict what the market will do in the near future, but there's a very good chance that long-term investors will be able to bank strong returns by backing the right companies on the heels of recent sell-offs. Read on to see why buying these two beaten-down growth stocks in 2023 could put you on track for market-crushing gains.
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1. Airbnb: Down 49% in 2022
Airbnb (ABNB 0.10%) has built and grown a category-leading platform for booking short- and long-term stays and local experiences. The company has had a revolutionary impact on the travel and hospitality industries, and its business thrived in 2022 as demand rebounded amid the easing of pandemic-related pressures.
Sales increased 29% year over year in the third quarter, reaching $2.9 billion, and the business recorded its best-ever performance for net income and free cash flow (FCF). Net profits surged 46% year over year to reach $1.2 billion, and FCF jumped approximately 80% to reach $960 million. But there's been a big disconnect between Airbnb's generally stellar business results and its lagging share price.
The market's flight from growth stocks and concerns about macroeconomic challenges on the horizon drove Airbnb stock down 49% in 2022. But I continue to have strong conviction that the company will bounce back over the long term. The stock remains one of my largest holdings, and I think it stands out as an attractive investment opportunity at current prices.
With a market cap pushed down to roughly $54.1 billion, Airbnb is valued at approximately 16.4 times the $3.3 billion in FCF it has generated over the trailing-12-month period. The company is facing macro pressures coming into 2023 that will likely lead to growth deceleration in the near term, but Airbnb's stock trades at levels that leave room for tremendous long-term upside.
While midpoint guidance for sales growth of 20% in the fourth quarter represents a step down from the rate of revenue expansion that shareholders had gotten used to, that's still a solid clip, and the business is proving it can generate strong cash intake. The company posted a 42% net income margin in the third quarter, and it has recorded an FCF margin north of 40% over the trailing 12 months.
Airbnb has shown it can respond flexibly to challenges and can scale up in a cost-effective fashion, and its stock stands out as a great buy right now.
2. Cloudflare: Down 66% in 2022
Cyberattacks are only becoming more common, and the cost of the damage they create is rising as well. Cloudflare (NET -1.05%) says it currently blocks more than 126 billion cyberthreats per day, and it's virtually certain that the number will continue to climb.
The company also provides content delivery network (CDN) services that make it possible for websites and applications to send and receive information from around the world at a much faster rate.
Cloudflare's revenue grew 47% year over year in the third quarter, and the company notched a 76% gross margin in the period. The web services specialist is also already posting positive operating income, recording an operating profit of $14.8 million on a 5.8% margin last quarter.
Despite strong business performance, the company's share price has slumped in conjunction with the broader pullback for growth stocks. The stock fell 66% in 2022 and is off roughly 79% from its high.
But this category-leading software company is hardly down for the count. As businesses scale and have a large imprint across the web, they have greater need for Cloudflare's services. This sets up an advantageous dynamic where it helps enable the growth of its customers and benefits from it as well.
The company has been seeing impressive growth for its large customer count, with the category expanding 51% year over year to reach 1,908 clients in the third quarter. While the company has more than 156,000 paying customers, it actually generates more than half of its revenue from the 1,908 clients it counts in its large-customer category.
With strong gross margins and a business that looks fantastically positioned for massive scalability, Cloudflare has what it takes to deliver big profits and earnings growth over the long term and be a huge winner for investors.
