Growth stocks were hit the hardest in the market sell-off last year, as investors turned toward value stocks in response to concerns about an economic downturn. That downturn has yet to fully happen (and may not happen), and so with valuations down, now could be a good time for long-term investors to consider putting some money to work.
If you have $1,000 (or even less) that you don't need to pay down short-term debt, bolster an emergency fund, or put toward your monthly bills, you might want to allocate it toward growth stocks this month. Here are two companies to consider adding to your portfolio.
1. Alphabet
Alphabet (GOOG 0.74%) (GOOGL 0.55%) is probably one of the safest growth stocks to consider for the long term. The company's dominance in online search catapulted the share price up 353% over the last 10 years, and there are several ways it can deliver more gains.
Alphabet is involved in several businesses, including cloud services (Google Cloud) and YouTube, but its widely used search engine is the moneymaking machine via advertising revenue. The economic uncertainty caused the growth in advertising revenue to slow and the stock to fall last year. However, this will turn into a tailwind when the economy turns around, which is one reason the stock could be undervalued right now.
Another reason to like Alphabet is the opportunity in artificial intelligence (AI). These trends play to Google's strength, since the entire company is centered around this technology. Google uses AI to deliver information to users and advertising businesses, as well as content recommendations on YouTube.
Google Cloud is posting strong growth lately, and key drivers are the AI-powered applications that businesses use to process data in a timely manner. Google Cloud revenue jumped 28% year over year in the first quarter and could become a much larger contributor to the company's financial results down the road.
YouTube is another valuable asset. It's already the most-watched streaming platform and has 80 million premium subscribers, with an additional 5 million subscribers to YouTube TV. Over the past year, all YouTube products generated nearly $40 billion in revenue.
Even after the recent rebound, the stock is still attractive. Alphabet is an above-average business with a wide competitive moat selling at an average valuation of 24 times 2023 earnings estimates.
2. Toast
Many investors may not be familiar with Toast (TOST -0.52%), but it's a fast-growing software-as-a-service (SaaS) platform provider catering to the restaurant industry. The stock is trading 69% off its all-time high, which has brought the shares down to a more attractive valuation.
Toast operates in a competitive market against other cloud-based restaurant platforms like Olo and other legacy software providers. But Toast's all-in-one platform -- which combines point-of-sale, marketing, and digital ordering management -- is proving to be a great sales pitch to restaurant owners. Over the last three quarters, the company reported a year-over-year increase in annualized recurring revenue above 50%.
Toast has consistently won the majority of contracts it competes for in the market. Management credits this to its purpose-built platform for the restaurant industry.
Over the long term, changing consumer behaviors are opening up a huge opportunity. Ordering takeout is now more important to customers than ever before. Global industrywide revenue in the online food delivery market is expected to double to $1.6 trillion by 2027, according to Statista. This will inevitably drive more restaurants to consider software solutions like Toast to handle takeout orders, curbside pickup, etc. The trajectory of the company's high annualized revenue growth is evidence it is capturing a massive opportunity.
Toast can serve any restaurant in the U.S., so there's a big enough market domestically. But it also just launched in Canada, Ireland, and the U.K., which significantly stretches the potential runway for growth.
Toast shares sell at a much lower price-to-sales ratio than other SaaS stocks, which could make them a smart buy right now. Many other leading names in the space trade at 10 times annual revenue or higher, but Toast stock currently sells for less than 4 times trailing revenue. This could be an under-the-radar growth stock worth considering.
