In 2022, growth stocks were decimated. But so far in 2023, growth stocks have been the place to be, with many up significantly from where they entered the year.
Three that have done well but still have room to run are CrowdStrike Holdings (CRWD -0.68%), The Trade Desk (TTD 3.35%), and Twilio (TWLO 1.08%). Their shares are up 9%, 15%, and 24%, respectively, since Jan. 1. But this is likely just the beginning, as the long-term trajectory of these companies is much higher than their current stock prices.
1. CrowdStrike
CrowdStrike is a top provider of cloud-based cybersecurity. With more than 21,000 customers collectively paying more than $2.3 billion annually for its products, the company has established a foothold in a vital industry.
What clients appreciate about CrowdStrike's platform are the constant upgrades. It uses artificial intelligence (AI) and machine learning to process trillions of data points gathered weekly to determine what is a threat and what is everyday activity.
While the business doesn't produce any profits under generally accepted accounting principles (GAAP), it is free-cash-flow (FCF) positive and produces a ton of it. In the third quarter of fiscal 2023 (ending Oct. 31, 2022), CrowdStrike produced $174 million in FCF from $581 million in revenue for a 30% margin. If CrowdStrike maintains this margin throughout the year, it could produce $888 million in FCF in fiscal 2024, according to Wall Street projections.
That means CrowdStrike trades for about 29 times next fiscal year's free cash flow, an extremely reasonable valuation for a company that grew sales by 53% last quarter and is expected to grow by 45% in the fourth quarter. This stock is a no-brainer buy because of how large the cybersecurity opportunity is and how strong CrowdStrike's business is.
2. The Trade Desk
When the economy sours, businesses pull back on advertising to conserve resources. This has been reflected in the results of ad giants like Alphabet and Meta Platforms. But one area that is still growing strongly is ad tech, which The Trade Desk provides.
The Trade Desk's platform helps advertisers automatically bid on the best location for their ad on the internet using proprietary and client data. This targeting method increases success, making clients more efficient in advertising spending.
Like CrowdStrike, The Trade Desk also produces strong free cash flow, with a 28% margin in the third quarter. It also didn't experience much client turnover, with 95% of customers staying with it in the third quarter, even though the advertising market softened.
The Trade Desk is more expensive than CrowdStrike, trading for 46 times projected 2023 free cash flow. However, this isn't a bad price for a company that hasn't reached its full potential and is growing at a 31% pace.
With ad spending likely returning at the end of 2023 thanks to a brighter economic outlook, The Trade Desk could have a big end to the year, but its long-term prospects are even brighter.
3. Twilio
Communicating with customers is a vital part of any successful business. Twilio gives clients of all sizes this ability with its APIs (application programming interfaces) that allow even the least tech-savvy person to program automated texts or customized marketing emails.
Twilio can also help reduce customer acquisition costs, just like it did with Domino's Pizza when it cut its cost to acquire a customer by 65%.
In its quest to become the go-to solution for customer communication and attraction, the company has made multiple acquisitions. It's been a trade-off; Twilio hasn't made any profit as a public company. However, management expects to achieve adjusted operating profitability in 2023, a good sign.
It also promised investors 30% organic revenue growth through 2024 but had to retract that guidance in the third quarter, which sent the stock plummeting. This reaction was overdone because the guidance indicated 29% revenue growth for 2022. But because investors can be demanding, you can pick up Twilio's stock for a dirt-cheap price.
TWLO PS ratio data by YCharts.
Twilio is worth looking at due to its low valuation and rapid growth. Throw in some signs of profitability, and Twilio becomes a stock worth owning in 2023 and beyond.
