Unless you're a short-seller or were invested heavily in energy stocks, 2022 was probably a struggle from an investment standpoint. The ageless Dow Jones Industrial Average, benchmark S&P 500, and growth-dependent Nasdaq Composite (^IXIC 1.11%) all plunged into bear market territory.
While a peak-to-trough decline of 38% in the Nasdaq since November 2021 certainly isn't what most investors wanted or expected, it's nevertheless an opportunity to load up on high-quality stocks at reduced valuations. After all, every double-digit percentage decline in the major indexes, including the Nasdaq, has eventually been wiped away by a bull market rally.
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In particular, the underperformance of the Nasdaq Composite puts growth stocks on the radar as potentially amazing deals as we enter the new year. What follows are five extraordinary growth stocks you'll regret not buying on the Nasdaq bear market dip.
Amazon
The first sensational growth stock you'd be foolish not to add during the Nasdaq bear market plunge is e-commerce kingpin Amazon (AMZN 1.49%). Despite economic weakness and rapidly rising interest rates threatening its core revenue segment (online retail sales), Amazon's substantially higher-margin ancillary operating segments are firing on all cylinders.
Even though Amazon could account for around 40% of all U.S. online retail sales in 2022, according to a March report from eMarketer, e-commerce is a low-margin operating segment. What's been far more important for Amazon is the continued double-digit sales growth it's netting from subscription services, advertising services, and Amazon Web Services (AWS) -- and the latter generates the bulk of the company's operating income and cash flow.
As of April 2021, Amazon had more than 200 million global Prime subscribers. This figure is likely much higher now, especially with the company holding the exclusive rights to Thursday Night Football. Based on third-quarter subscription service revenue of $8.9 billion, the company is generating $35.6 billion in high-margin and predictable annual run-rate sales from this segment.
Meanwhile, a recent report from Canalys estimates AWS accounted for 32% of global cloud infrastructure service spending in the third quarter. AWS is pacing more than $82 billion in annual run-rate revenue, and its juicy margins give Amazon a reasonable shot to triple its operating cash flow by 2025. Amazon's skyrocketing operating cash flow is what really makes this company an incredible bargain.
Lovesac
For investors who want something a bit more under the radar, small-cap furniture stock Lovesac (LOVE 5.38%) is a company you'll regret not scooping up during the Nasdaq bear market dip. In spite of rising inventory levels, Lovesac is well-positioned to continue disrupting a stodgy industry.
One of Lovesac's biggest differentiators is its furniture. Whereas most brick-and-mortar retailers lean on the same small group of wholesalers, Lovesac is generating close to 88% of its net sales from sactionals -- modular couches that can be rearranged dozens of ways to fit most living spaces. Sactionals have over 200 different cover choices, and the yarn used in these covers is made entirely from recycled plastic water bottles. Lovesac's key product offers functionality and optionality, while also having environmental, social, and governance (ESG) ties.
Additionally, Lovesac has navigated the challenging economic environment by having a nimble sales platform. The company's omnichannel approach can pivot to online sales, popup showrooms, and partnerships to boost sales, in addition to its more-traditional 189 retail locations spread across 40 states. This omnichannel platform helps to keep expenses down and margins up.
Lastly, the company turned the corner to full-year profitability years ahead of Wall Street's expectations. At roughly 8 times forward-year earnings, Lovesac is about as inexpensive a growth stock as you'll find.
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Datadog
The third extraordinary growth stock you'll regret not buying as the Nasdaq plummets is infrastructure and security-monitoring software-as-a-service (SaaS) juggernaut Datadog (DDOG 1.65%). Although the company's premium valuation has acted as a cement block on its share price throughout 2022, its operating performance and niche positioning suggests its valuation premium is well-deserved.
Beginning with the latter, Datadog is poised to take advantage of an increasingly hybrid work environment. Though COVID-19 vaccines have allowed millions of people to return to the office, more people are working remotely than ever before. The ability for businesses of all sizes to monitor applications and better understand their customer(s) is more important than ever in the post-pandemic environment. In other words, it's playing right into Datadog's strengths.
What's been particularly impressive about Datadog has been its organic growth. The company has produced 21 consecutive quarters (more than five years) of a dollar-based net retention rate of at least 130%. This means the company's existing clients from the previous year are spending an average of at least 30% more in the following year.
In addition, the percentage of Datadog's customers using six or more of its products has jumped from just 3% at the end of 2020 to 16% by the end of September 2022. Growing from within and coercing add-on sales is Datadog's secret sauce to sustained rapid growth and profitability.
Innovative Industrial Properties
Another phenomenal growth stock you'll be kicking yourself for not buying during the Nasdaq bear market decline is marijuana-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR 2.41%). Even though Capitol Hill has failed on virtually all of its efforts for federal cannabis reform, IIP, as Innovative Industrial Properties is more commonly known, is actually benefiting from this Washington, D.C. standstill.
When September came to a close, IIP owned 111 properties spanning 8.7 million square feet of rentable space in 19 legalized states. Through the first nine months of the year, 97% of its rents were collected on time and it was sporting a weighted-average lease length of more than 15 years. This is why IIP is generating highly predictable cash flow and doling out an inflation-fighting 7% yield.
It's also worth pointing out that 100% of its portfolio is triple-net leased. This fancy term simply means its tenants cover all costs associated with the property, including maintenance, utilities, property taxes, and even insurance premiums. In return for a lower rental rate, IIP doesn't have to worry about the effects of inflation or any surprise expenses.
Innovative Industrial Properties is benefiting from its sale-leaseback program, as well. As long as the federal government holds cannabis as a Schedule I drug, multi-state operators' (MSOs) access to basic financial services will be limited. IIP steps in to buy growing or processing facilities with cash and then leases these properties back to the seller. It's a win-win for both parties, with MSOs receiving much-needed cash and IIP landing long-term tenants.
Baidu
The fifth and final extraordinary growth stock that you'll regret not buying on the Nasdaq bear market dip is China-based internet-search powerhouse Baidu (BIDU 2.30%). Though China's zero-COVID strategy has been a drag on Baidu and its peers in 2022, a loosening of this strategy should open the door for a resumption of its rapid growth moving forward.
Baidu's key cash-flow driver continues to be its leading internet search engine. Data from GlobalStats shows that Baidu has accounted for no less than a 60% share of internet search in the world's No. 2 economy over the trailing-three-year period, beginning November 2019. This makes it the logical go-to for advertisers wanting to reach Chinese consumers, and puts quite a bit of ad-pricing power in Baidu's court.
But similar to Amazon, it's the company's ancillary operating segments that could really drive valuation-multiple expansion in the coming years. Specifically, Baidu is investing heavily in artificial intelligence (AI)-fueled growth. The company's AI Cloud and world-leading autonomous-vehicle operations (Apollo Go) were responsible for pushing non-marketing revenue higher by 25% in the latest quarter. These are operating segments with the potential to deliver higher margins than advertising.
Baidu is also at a compelling valuation following a significant pullback. For a company that's regularly grown sales by a double-digit percentage, a forward price-to-earnings multiple of less than 13 is inexpensive.
