Investors are more nervous about growth stocks lately. The potential for a recession ahead, plus the higher cost of debt, means there's a higher risk of faltering earnings and weaker sales into 2024.
While a recession would likely put pressure on most growth companies' businesses, investors can minimize the risk that poses to their portfolios by focusing on companies with diverse revenue streams and strong finances.
With those goals in mind, let's look at some good reasons to buy shares of Netflix (NFLX 1.85%) and Chewy (CHWY 0.87%) right now.
Tune in to Netflix
Netflix is set to announce its first-quarter results on April 18, but investors don't have to wait until then to buy the stock. The streaming video giant's last report back in mid-January contained plenty of signs of a rebound in the business.
Take subscriber trends, which beat expectations and rose for the second straight quarter to end 2022. This boost was powered by improvements to Netflix's content catalog and the streaming experience. Its crackdown on password sharing, plus the addition of advertising revenue from its new ad-supported tier, should help the company achieve better results this year.
"We believe we have a clear path to reaccelerate our revenue growth," management told investors in the Q4 letter to shareholders.
Netflix is also highly profitable, and management is projecting even better operating profit margins in 2023. Free cash flow should be at least $3 billion, or double last year's haul. Successes here should help support impressive shareholder returns over time, regardless of how strong its subscriber trends end up being when management announces Q1 results in a few weeks.
Chewy will deliver
The bullish thesis for Chewy stock rests on the idea that its 2022 results represent a brief interruption to its longer-term growth story. Sure, the pet supply specialist posted strong sales growth and improving profit margins. But its active shopper base shrank slightly in its fiscal Q4, which ended Jan. 29, falling 1% to 20.4 million.
Chewy will bounce back. The e-commerce specialist enjoys incredible customer loyalty, with its subscription-based sales accounting for 73% of the business in 2022 compared to 70% a year earlier. While recent price increases pressured sales volumes, they've bolstered the company's financial strength and demonstrated its ability to pass along its rising costs to consumers.
The business might see more pressure through 2023 from a continued decline in discretionary pet purchases. But Chewy has already shown that it can generate solid profits in that type of environment. Looking further out, it has attractive growth opportunities, including a plan to expand into international markets.
Meanwhile, investors can take advantage of Wall Street's short-term pessimism to pick up this growth stock at a discount. Shares are trading for just 1.4 times sales, down from over 6 times sales at the market's peak in late 2021.
It's possible that its valuation will decline further in the near term, especially if economic growth continues slowing. But the pet supply industry is less sensitive to recessions than other consumer niches. And Chewy has a good shot at leading the industry out of the current cyclical downturn. That's why growth stock investors should take a hard look at the stock today.
