2 Growth Stocks Brilliant Money Managers Are Buying Hand Over Fist

Only a handful of professional money managers actually beat the S&P 500 (SNPINDEX: ^GSPC) on a regular basis, but Arne Alsin and Karthik Sarma have done just that. The S&P 500 rose 67% during the three-year period that ended on March 31, 2023. Alsin and Sarma saw their hedge funds increase 107% during that time. That outperformance suggests both investors offer a good source of stock-picking inspiration.

With that in mind, Alsin was buying shares of Amazon (AMZN 1.49%), and Sarma was buying shares of Twilio (TWLO 1.84%) hand over fist in the first quarter. Here's what investors should know about those two growth stocks.

1. Amazon

Alsin increased his stake in Amazon by 43% during the first quarter and 1,400% over the past year. The stock now represents more than 3% of his portfolio through Worm Capital, and excluding certain options contracts, it ranks as his third-largest holding. That high conviction is likely due to Amazon's strong competitive position in three growing markets: e-commerce, digital advertising, and cloud computing.

Specifically, Amazon operates the most-visited online marketplace in the world, and eMarketer estimates it will account for nearly 39% of retail e-commerce sales in North America and Western Europe this year. Amazon used that foundation to build a booming adtech business. Its ability to engage consumers and collect shopper data is invaluable to marketers, and Amazon is on pace to become the third-largest adtech company in the world this year.

Meanwhile, Amazon Web Services has become synonymous with cloud computing. Consultancy Gartner recognized AWS as the leader in cloud infrastructure and platform services (CIPS) for 12 consecutive years, and the company accounted for 32% of CIPS spending in the first quarter, topping its closest competitor Microsoft Azure by 9 percentage points. Cloud computing may be commoditized, but AWS offers a broader and deeper portfolio than any other vendor, which hints at consistent innovation. Those qualities kept the company on the cutting edge of cloud computing, and they should continue to do so in the future.

Amazon reported disappointing financial results last year. Revenue growth slowed, and operating expenses soared in response to macroeconomic headwinds, and that combination ultimately led to the company's first loss since 2014. But Amazon regained some momentum in the first quarter of this year. Revenue increased 9% to $127 billion, and the company reported a generally accepted accounting principles (GAAP) profit of $3.2 billion. But Amazon should continue to gain momentum as the economy improves.

Going forward, retail e-commerce sales, adtech spending, and cloud computing revenue are expected to increase at 14% annually through 2030, meaning investors can reasonably expect Amazon to grow revenue at 14% annually (or faster) through the end of the decade. That forecast makes its current price-to-sales ratio of 2.3 look cheap. Investors should consider buying a few shares of this growth stock today.

2. Twilio

Sarma increased his stake in Twilio almost fivefold during the first quarter. The stock now represents about 3% of his portfolio through SRS Investment Management, and it ranks as his sixth-largest holding. That hints at high conviction.

Twilio is the market leader in communications platforms as a service (CPaaS) software. That puts the company in a market adjacent to unified communications as a service (UCaaS) providers like Zoom Video Communications. Whereas UCaaS vendors offer ready-to-use communications applications, CPaaS vendors provide tools that help developers embed communications in their own applications. For instance, Twilio offers application programming interfaces (APIs) that make it easy for developers to incorporate text, video, voice, and email into their software.

Twilio also provides more comprehensive products that build on its foundational APIs, and that strategy helped propel the company to the top of the CPaaS market. For instance, Twilio Flex is a programmable contact center that lets service agents engage with customers across multiple channels. Similarly, Twilio Engage is a marketing application that allows businesses to run personalized campaigns through SMS messages and email.

Twilio reported lackluster financial results in the first quarter. Its customer count climbed 12%, and the average customer spent 6% more. In turn, revenue rose 15% to $1 billion, a significant deceleration from 48% revenue growth in the prior year. Worse yet, the company reported negative free cash flow (FCF) of $115 million, meaning its burn rate accelerated since losing $35 million last year. Of course, investors should not put undue weight on any particular quarter, but burning cash has become a baseline. In fact, Twilio never consistently generated positive FCF in its history as a public company.

Looking ahead, Grand View Research says the CPaaS market will increase by 31% annually to reach $101 billion by 2030. Twilio should benefit from that tailwind, but I would still advise caution with this stock (and I say that as a shareholder). I have no plans to sell at the present time, but I also have no plans to buy more. I want to see the company generate positive FCF for at least two consecutive quarters before I consider adding to my position.