Despite some recovery momentum across 2023's first quarter of trading, most growth stocks still trade down massively from previous highs. That doesn't mean that investors can afford to go around buying risky stocks indiscriminately, but there are undoubtedly some great opportunities on the market right now.
For investors willing to embrace potential volatility in the near term, building positions in strong companies that have seen big valuation pullbacks could have tremendous payoffs. If you're on the hunt for beaten-down growth stocks trading at prices that leave room for explosive long-term returns, here's why these two companies look like top buys this month.
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1. Cloudflare
Cloudflare (NET 2.15%) is a leading provider of protections against distributed denial of-service (DDoS) attacks. The web-services specialist blocked an average of 136 billion cyberattack instances a day in the fourth quarter, up from 126 billion in Q3. Cloudflare is also a leading provider of content-delivery-network (CDN) services that speed up information transfers across the internet and domain-name-system (DNS) services that connect users with their desired web addresses.
It wouldn't be an exaggeration to say that Cloudflare is one of the most important providers of internet-infrastructure services in the world, and the company has been growing sales at an impressive pace. The software-services provider grew revenue 42% year over year in the fourth quarter to reach $274.7 million, a performance that brought sales growth to 49% for the year and revenue for the period to $975.2 million. In addition to landing new customers big and small, the company has continued to successfully expand its business relationships with existing clients.
Cloudflare posted a dollar-based net-revenue-retention rate of 122% in the fourth quarter, which means that customers already using its services increased spending 22% year over year compared to the prior-year period. That's an encouraging performance, but there's still room for significant improvement from there. Management expects that it will eventually be able to get the business to a net-revenue-retention rate above 130% thanks to product offerings, including its Zero Trust identity verification platform and its R2 service for storing massive amounts of unstructured data.
But despite posting strong business performance and having a long runway for continued expansion, Cloudflare stock has seen a dramatic pullback in conjunction with the market's pivot away from growth stocks. With the company's stock trading down roughly 72% from its high, I think there's a very good chance that investors who take a buy-and-hold approach will see market-crushing returns from shares purchased at today's prices.
2. Shopify
Shopify's (SHOP 0.88%) tools for building, maintaining, and scaling online-retail stores have never been more popular, but the company's business and stock performance has been uneven over the last couple of years. In addition to the market's general shift away from stocks with growth-dependent valuations, the e-commerce specialist faced rising expenses and the evaporation of pandemic-driven demand.
Even though Shopify's stock is now down roughly 72% from its high, the company continues to look very solid and has avenues to strong performance over the long term. Revenue grew roughly 26% year over year in the fourth quarter to reach $1.7 billion and beat the market's target, and non-GAAP (generally accepted accounting principles) adjusted earnings per share of $0.07 came in well ahead of the average analyst estimate's target for a per-share loss of $0.01.
But while Shopify delivered sales and earnings beats in Q4, the company anticipates some headwinds in the near term. Management's guidance for sales growth to decelerate to a high-teens rate in this year's fourth quarter and cautious comments about the macro backdrop prompted sell-offs for the stock. With the e-commerce services specialist having yet to recover from the post-earnings pullback and its price-to-sales multiples not far removed from historical lows, there's a buying opportunity here.
SHOP PS Ratio (Forward) data by YCharts
Shopify's earnings will likely remain under pressure as the company faces macroeconomic headwinds and invests to build out its order-fulfillment infrastructure. However, I think the company will continue to play a key role in pushing the broader e-commerce space forward and go on to deliver strong returns for long-term shareholders.
Founder and CEO Tobi Lütke has generally done an excellent scaling the business and navigating the requirements of different growth initiatives, and the foundations are there for the business to thrive as economic pressures ease. The move into fulfillment sets Shopify up to be an all-in-one e-commerce services provider, and the market seems to have become overly fixated on near-term growing pains.
