Massive valuation pullbacks have pushed prices for some growth stocks down to levels that leave room for fantastic upside. Macroeconomic headwinds on the horizon mean that investors have to be selective about which companies they put their money behind, but backing the right ones could have potentially life-changing payoffs for those willing to brave volatility in the near term.
With that in mind, read on to see why I think these growth stocks stand out as two of the best long-term investments you can make at the start of 2023.
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1. CrowdStrike
CrowdStrike's (CRWD 2.03%) technology is helping its customers stop cybercriminals before network breaches occur and damages escalate. The company's software prevents computers, mobile devices, servers, and other hardware with network permissions from being used as ways to breach and disrupt networks. With business and communications increasingly being conducted through digital channels and cybersecurity threats mounting, the business has been benefiting from incredible demand tailwinds.
CrowdStrike recorded sales of $580.9 million in the third quarter, good for 53% growth year over year, and the company is already delivering strong free cash flow and posting profits on an adjusted basis. FCF jumped 41% compared to the prior-year period to reach $174.1 million in Q3, representing a roughly 29% margin. With adjusted net income surging roughly 134% year over year to reach $96.1 million, the business also recorded a roughly 16.5% adjusted net income margin in the period.
With $2.47 billion in cash and equivalents against no debt, CrowdStrike also has a strong balance sheet that should help it pursue internal growth projects and potential acquisition opportunities as they arise. This is a fast-growing, high-margin business with solid financial foundations and favorable long-term demand tailwinds at its back. But the market has fixated on challenges that could shape near-term performance and punished the stock.
Macroeconomic headwinds are causing customers to adopt more cautious stances and push spending further out, and that's likely going to lead to slower sales growth for CrowdStrike in the near term. On the other hand, management's guidance for a 44.7% sales increase at the midpoint of its target in Q4 hardly represents a catastrophic deceleration, and long-term investors can profit from the surge in bearish sentiment that has shaped the stock's trading recently.
With the stock down roughly 49% over the last year and 64% from its high, CrowdStrike looks like a great long-term investment at current prices.
2. Cloudflare
Like CrowdStrike, Cloudflare (NET 1.44%) is a promising cybersecurity and web-services company that has seen its valuation depressed in the face of macroeconomic challenges. Cloudflare stock is down roughly 66% over the past year and 79% from its high, and I think that investors should seize this opportunity to build a position in this great company.
Cloudflare provides protection against distributed-denial-of-service (DDoS) attacks that try to overwhelm websites and applications with a barrage of server requests. The company estimates that it blocks 126 billion cyberthreats each day. In addition to its anti-DDoS software, the company also provides domain name system (DNS) and content delivery network (CDN) services that help ensure that websites and applications are accessible and able to more rapidly send and receive information. Customers clearly value these products.
Cloudflare ended the third quarter with a 124% dollar-based net revenue retention rate, reflecting a 24% increase in spending from existing customers. Along with continued growth for its total customer count, this helped the business grow revenue 47% year over year in Q3 to reach $253.9 million, and it also recorded an impressive 75.6% gross margin in the period.
Cloudflare's overall total addressable market (TAM) opportunity should continue to expand as well. The company expects that its TAM will have grown from $115 billion in 2022 to $125 billion in 2023 and then to $135 billion in 2024. With the company's midpoint guidance for this year calling for $974.5 million in sales, Cloudflare is still just scratching the surface of its potential.
