3 Top Growth Stocks to Supercharge Your Portfolio

Issues with the economy abound at the start of 2023. Inflation is still high, and the U.S. Federal Reserve recently indicated it will still be raising interest rates this year to try to cool off economic activity. Businesses are taking the hint and scaling back their spending. 

Nevertheless, green shoots are emerging after a brutal bear market for growth stocks in 2022. Some of the most beaten-down names are up by double-digit percentages early in 2023 as their management teams focus less on just growth and more on growth and profitability. Three Fool.com contributors think the narrative is in the process of changing for Sea Limited (SE 4.34%), Datadog (DDOG 3.58%), and Farfetch (FTCH -8.42%). Here's why these contributors think these stocks could supercharge your portfolio in the coming years. 

This e-commerce platform proves it can deliver the goods to shareholders

Nicholas Rossolillo (Sea Limited): It's been a long and difficult road for southeast Asia's leading e-commerce platform Sea Limited. Share prices are down nearly 80% from their all-time high set during the second half of 2021 -- when the digital economy was in bubble territory in the wake of pandemic lockdowns.  

Sea's management scrambled to convince the market it can be a profitable enterprise, and the company just made an excellent case in its own favor to close out 2022. Q4 2022 revenue was up just 7% year over year to $3.5 billion, but the bottom line (on a GAAP basis) turned from red to black. Net income of $423 million was a stunning reversal from the net loss of $616 million the year prior.  

It wasn't just the video game segment (Garena, the studio responsible for the global hit Free Fire) pulling dead weight like in years past. The e-commerce segment notched positive adjusted EBITDA (earnings before interest, tax, depreciation, and amortization), as did the small but still fast-growing digital financial services segment.  

Data source: Sea Limited. YOY = year over year.  

Most impressive about this performance is that Sea is hitting profitability far ahead of schedule. Just three months ago, the stated goal was to achieve profitability "by the end of 2023." It has cleaned up its mess and gotten into better financial shape ahead of schedule. Investors will now want to monitor if this trend can sustain throughout the rest of 2023. Management admitted profits will be lumpy from one quarter to the next.  

To be sure, it's still very early days for Sea's new voyage. I expect this stock to be highly volatile. Nevertheless, with shares trading at 8.6 times trailing-12-month gross profit, I think this e-commerce business is worth nibbling on again if you believe it can continue growing profitably. If you thought it offered a decent risk-to-reward payoff a few months ago, it appears Sea has even more favorable winds working for it today -- so I'm keeping this one on my close watch list in the coming months.

Datadog: A hungry little dogfish in a big and growing pond

Anders Bylund (Datadog): Data analytics is a crucial part of any company's business toolkit nowadays. Datadog provides a valuable service in this space, helping companies monitor and analyze their network security data. The company ingests many different data sources into a cloud-based system, applying artificial intelligence and hand-built tools to uncover security threats and operating issues before they become a problem.

With Datadog, you get a single unified view of all of your data with searchable metrics and effective visualizations. These tools help IT managers keep their cloud-based systems online and operational, avoiding unexpected downtime and supporting a better customer experience.

This is a massive business opportunity. Let's look at just one piece of Datadog's overall service portfolio. Gartner estimates that the observability market amounted to $44 billion of global revenue last year, expanding to $62 billion by 2026. Datadog is a small dogfish in a huge pond.

The company is expanding its slice of that enormous market. Its customer list expanded by 23% year over year in last month's fourth-quarter report. The number of large clients, with annual contracts of at least $100,000, increased by 38% in the same time span. And the average contract also grew larger, driving top-line sales 44% higher.

Mind you, that amounts to a slow quarter in Datadog's history. The 44% revenue jump was the slowest increase in company history.

Data by YCharts

I can't wait to see what Datadog can do in a healthier economy with fewer restraints on its clients' data security budgets. The stock trades at a lofty valuation of 13 times sales and 58 times free cash flow, so devout value investors should probably look elsewhere. But to growth investors like yours truly, Datadog has earned that rich valuation and more. The stock is down by roughly 45% over the last year, making its soaring stock price quite a bit more palatable to investors of all stripes.

The leading luxury goods marketplace trades at less than 1 times sales

Billy Duberstein (Farfetch): After years of hypergrowth, European luxury goods e-commerce platform Farfetch saw growth stagnate last year, with revenue up just 3% in 2022, on gross merchandise volume (GMV) that was down 4%.

But is Farfetch really an ex-growth company? It trades like it, at less than 1 times revenue, having plummeted over 90% from its highs.

Data by YCharts.

But consider this: Farfetch faced a near-perfect storm last year. As the world's largest luxury e-commerce marketplace, Farfetch had to close down its Russia business -- its third-largest market. Amid Chinese lockdowns, sales in China -- the company's second-largest market -- also fell hard, whereas that would normally be a growth area. And third, the dollar strengthened, impacting dollar-equivalent sales overseas. In fact, in constant currency, GMV didn't fall but actually grew 2%, and revenue was up 12% for the year, despite those headwinds.

Considering the company will be lapping those headwinds this year, Farfetch's growth should look much better. In addition, the company took 2022 as an opportunity to cut costs and streamline the business. The company cut its headcount by 17%, and lowered its fixed cost base by 10% while reorganizing and simplifying its operating structure.

This sets up Farfetch for a much, much better 2023. Management put forward a solid-looking projection of $4.9 billion in GMV this year, which would mean growth of 16%, along with positive adjusted EBITDA margins between 1%-3%, and positive free cash flow. Growth should also accelerate through the year, as Farfetch's platform solutions onboards new accounts from Salvatore Ferragamo and Reebok in the second quarter, with Nieman Marcus Group in the fourth. Meanwhile, Farfetch is awaiting regulator approval to acquire its biggest rival, Yoox Net-a-Porter. Should the deal go through, it could add incremental growth in 2024 and beyond. 

At less than 1 times sales, shares look pretty de-risked at this point; meanwhile, it's possible the business surprises to the upside, which could lead to a big move higher.