If you have a lot of growth stocks in your portfolio, the past 16 months have been ones that you'd probably prefer to forget. The Vanguard Growth ETF is down about 23% since the beginning of 2022.
While the stock market's performance over the past year has been a disappointment, better times are on the way. Every bear market in history has been wiped away by subsequent recovery periods, and the next upswing could be just up ahead.
The next bull market may have already begun, or it might not get started for another couple of years. Either way, investors who buy shares of these top growth stocks now have a great chance to realize market-beating gains over the long run.
DigitalOcean
DigitalOcean (DOCN 0.95%) is a cloud-service provider that is increasingly popular among individual developers. It's also popular among small to medium-sized businesses that don't do enough business to justify a subscription with one of the big three cloud-service providers: Alphabet, Microsoft, and Amazon.
Unlike its enormous competitors, DigitalOcean allows developers to build and deploy functioning applications for $0 upfront. With a pay-as-you-go model that small developers prefer, the company quickly starts recognizing revenue once applications it hosts begin consuming bandwidth.
The stock peaked back in 2021 when previously employed developers found themselves stuck at home with lots of free time. Decelerating growth convinced investors to knock the stock off its high perch, and it's still down about 73% from its previous peak.
At recent prices, shares of DigitalOcean are trading for the low price of just 20.6 times its forward-looking earnings expectation. That's a ridiculously low valuation to pay for a seemingly unstoppable business.
In 2022, DigitalOcean faced some big challenges beginning with Russia's invasion of Ukraine. Customers in those regions were responsible for 3.5% of total revenue. An even bigger issue was the collapse of Bitcoin and related developer activity. Before cryptocurrencies collapsed last year, blockchain-based customers were responsible for around 5% of total revenue.
Despite the huge challenges it faced in 2022, DigitalOcean reported sales that soared 34% year over year. The vast majority of its customers spend less than $50 per month, but around 15,000 were spending more than $500 per month. Long-term investors can find encouragement in the fact that its biggest customers aren't jumping ship for a larger cloud provider. Fourth-quarter revenue from customers that spend $500 or more per month jumped 45% year over year.
Pubmatic
Pubmatic (PUBM 2.19%) operates an independent advertising platform for publishers who want top dollar for their available ad inventory. The stock spiked during the lockdown period of the pandemic but has since fallen around 79% from its peak.
Looming signs of a recession convinced businesses everywhere to cut back on their advertising budgets last year. Pubmatic reported Q4 revenue that fell 1.7% year over year. This was disappointing but still much better than Alphabet's Google advertising segment, which reported revenue that contracted by 3.6% over the same time frame.
The company's platform supports most digital ad formats, but right now, omnichannel video is outpacing older display ads that are in steep decline. In Q4, revenue from connected television (CTV) more than doubled , and this will likely be a strong source of growth in the years to come.
Streaming fatigue could mean trouble for Netflix's subscription-derived revenue base, but it's creating an ideal situation for Pubmatic. The company already has a partnership with Roku, which is the most-watched streaming platform in North America by hours viewed.
A proliferation of ad-supported streaming services is pulling big brand advertisers away from old-fashioned linear television, but this industry shift isn't baked into Pubmatic's stock price yet. Right now, it's trading for 28.3 times trailing earnings. As one of the premier platforms for CTV publishers, Pubmatic is growing at a pace that justifies this valuation, which shouldn't be a problem.
