Investors battled a particularly brutal stock market last year. In fact, the three major U.S. financial indexes delivered their worst annual performances since the Great Recession in 2008. The Dow Jones Industrial Average slipped 9%, the broad-based S&P 500 fell 19%, and the tech-heavy Nasdaq Composite nosedived 33%.
All three indexes have recovered to some degree this year, but the benchmark S&P 500 is still in a bear market, and many growth stocks are still trading well below their highs. For instance, shares of Atlassian (TEAM -0.75%) and Cloudflare (NET -1.47%) are down around 60% and 68%, respectively.
Of course, not all beaten-down stocks are worth buying -- but Atlassian and Cloudflare are well positioned to rebound during the next bull market. Here's why now is a perfect time to buy these growth stocks.
Atlassian: A leader in productivity and team collaboration software
Australian software company Atlassian disappointed investors with its latest earnings report. In the second quarter of fiscal 2023 (ended Dec. 31, 2022): Revenue rose just 27% to $873 million, a material deceleration from 37% growth in the prior year, and free cash flow fell 24% to $146 million. Unfortunately, management expects the situation to deteriorate further as the company continues to battle economic headwinds. Guidance implies top-line growth of just 22% in the third quarter.
The near-term picture may not be pretty, but Atlassian can reaccelerate growth when economic conditions improve. Its software products improve business productivity by facilitating collaboration and streamlining workflows across different teams. That value proposition applies to virtually any industry, and it will only become relevant as digital transformation ushers in new technologies and remote work makes collaboration more complicated.
Atlassian has a somewhat unique go-to-market strategy. It leans heavily on self-service sales channels and word-of-mouth marketing, which keeps its sales and marketing costs low. Ultimately, that means Atlassian can invest more in product development than its peers, and that advantage has helped the company achieve a strong presence in several software verticals. Last year, Atlassian was recognized as a leader in IT service management and enterprise agile planning software by consulting company Gartner. Better yet, it currently ranks 12th on the list of best global software sellers, according to research company G2.
That success can be attributed to the broad scope of the its platform. Atlassian is the only work management software vendor that addresses the needs of technical teams (development, operations) and non-technical teams (marketing, human resources). Atlassian also brings IT service teams onto the same platform as software teams.
Those unique qualities give the company a material advantage for two reasons. First, Atlassian's broad utility means customers can standardize on a single platform, which eliminates the hassle of working with multiple vendors. Second, Atlassian can land new customers through almost any department, then expand across the entire business.
Management puts its addressable market at $29 billion, and that figure is growing at 14% annually. Atlassian is well positioned to capitalize on that opportunity, and shares currently trade at about 14 times sales, a discount to the three-year average of 28 times sales. At that price, investors should buy a small position in this growth stock today.
2. Cloudflare: A leader in content delivery network software
Cloud computing company Cloudflare turned in another solid financial report in the fourth quarter. Its customer count climbed 16% to about 162,000, while the average customer spent 22% more over the past year. In turn, fourth-quarter revenue rose 42% to $275 million and cash flow from operating activities soared 92% to $78 million.
Those results are particularly impressive in the context of a difficult economic climate, and the company could likely accelerate growth under more favorable conditions.
Looking ahead, the investment thesis is straightforward: Cloudflare provides a broad range of cloud services that improve the performance and security of business-critical applications and IT infrastructure, while eliminating the cost of on-premise network hardware. Despite tough competition from larger vendors like Amazon Web Services, Cloudflare has a strong presence in several cloud verticals, and the company is well positioned to take market share in others.
Why? Cloudflare benefits from two key advantages: speed and scale. It operates the fastest cloud network and developer platform on the planet. That has led to leadership in content delivery network software and edge development platforms, but speed coupled with freemium pricing has also led to mind-boggling scale. Cloudflare handles nearly 18% of all internet traffic, and it provides security services to 20% of the web, both of which afford the company unrivaled insight into performance issues and security problems across the internet. Cloudflare can use that data to improve its products, creating a network effect that should help it gain momentum in other cloud verticals, especially zero-trust security.
On that note, Forrester Research recently recognized Cloudflare as the leader in web application firewalls, and Gartner recognized the company as a leader in web application and API protection. So Cloudflare is making inroads in the security space, but the company has still only scratched the surface of its $125 billion addressable market. With shares trading at around 23 times sales, a bargain compared to the three-year average of 42 times sales, this stock is worth buying today.
