2 Top Growth Stocks to Buy Before the Next Bull Market

There's no denying that growth-centric companies operated under a uniquely challenging environment over the past 18 months or so. For many, that challenging environment was reflected in significant drops in the value of their stocks. That quick (and sometimes steep) drop came after significant stock price run-ups in the year prior. For investors, it wasn't easy (no matter your level of investing experience) to see such big portfolio gains in 2020 seemingly evaporate in such short order in parts of 2021 and in 2022. 

But even with the high volatility and the bear market it produced, several wonderful businesses still came out on top in the long run and built shareholder returns in the process. Whether a full-fledged bull market finally appears in 2023 or the volatility continues, keeping your focus fixed on the long-term and only investing in companies that align with that perspective can help you make winning stock choices in all kinds of markets. 

Here are two such businesses to consider buying stock in before the next bull market. 

1. Airbnb 

Airbnb (ABNB 0.75%) has done an excellent job of adjusting its platform to meet the demands of the modern traveler, particularly in a world much less hampered by a pandemic than it was two years ago. Airbnb built an asset-light, tech-focused business model. The asset-light aspect of Airbnb's business is key, as it doesn't own or operate the listings on its platform and instead generates revenue from the fees it collects on each transaction between host and guest. The company grew quickly and now controls about 20% of the vacation rental market. The global travel accommodation market it operates in is huge and growing. It's on track to reach a valuation of around $2 trillion by 2030.

If you're an investor surveying the travel space, one of your most notable concerns when looking at any business in this industry, including Airbnb, might be what happens if economic conditions worsen or a full-blown recession comes. Fortunately for Airbnb, its business benefits from providing a broad range of travel spending options. The rise of remote and flexible work, as well as the resurgence in cross-border travel, attracted additional potential users to its platform, attracted by the versatility on offer. Case in point: Close to one-fifth of all bookings made on Airbnb are for stays of 28 days or more. Many of these users are remote workers looking to take advantage of their workplace flexibility.  

Airbnb is also upgrading and refining its platform to meet hosts' and guests' changing needs. The company just added more than 50 upgrades to its platform, many focusing on making stays more affordable and helping hosts succeed. One such improvement involves a new partnership with Klarna that allows U.S. and Canadian guests to finance bookings using the buy now, pay later service.

Whatever it's doing, Airbnb's efforts seem to be working. By the end of 2023's Q1, Airbnb had reported nearly $4 billion in free cash flow over the trailing 12 months. Its trailing-12-month profits reached $2 billion.

Airbnb showed these past few years that it can generate growth from both the supply and the demand sides of booking travel accommodations regardless of the broader market and economic environments. In an industry as fragmented and competitive as the travel space, this is no easy feat. Analysts are projecting that the company can grow its top line by an average of 22% per annum over the upcoming five-year period alone. Investors may want to consider a buy-and-hold position in this growth stock. 

2. Etsy 

Etsy (ETSY 0.34%) is trying to manage in a conflicting operating environment of late. The growth of e-commerce continues, but spending patterns are in flux as consumers worry about an uncertain economic landscape. Still, Etsy.com continues to be its core growth driver focused on serving the specialty, unique, and handmade sector of e-commerce. It also operates two other marketplaces: Reverb for buying and selling musical instruments and Depop for fashion resale.

Part of its management efforts involved selling Elo7, its e-commerce platform purchased in July 2021 that was dubbed "The Etsy of Brazil." Elo7 didn't perform at the scale management hoped for, creating a drag on the top and bottom lines. The sale is expected to close in the third quarter. 

Etsy isn't witnessing close to the same level of growth that it was at the height of the pandemic. But stepping back and looking at its journey over the last few years offers a revealing look at where this business is going. For example, the company reported total gross merchandise sales (GMS) of $3.1 billion in Q1 2023 ($2.7 billion of which was from the Etsy platform). That GMS was down about 5% year over year, but it was up a whopping 203% on a four-year basis. Etsy's revenue in Q1 2023 came to $641 million, up 11% year over year and up about 280% from four years ago.

Importantly, the company's take rate from sales on the various platforms steadily increased over the past few years. That take rate was 21% in Q1 2023, compared to 18% a year ago. Etsy also got back to turning a profit in Q1 2023, reporting net income of about $75 million.

Investors have shied away from the stock recently for various reasons, including the general volatility afflicting growth stocks, concerns about e-commerce spending in a tough macro environment, Etsy's slowing rate of growth from the early pandemic days, and shifts in profitability are all elements here. That helped lower its price-to-sales ratio to a mere 4.8, well below its average 8.4 P/S ratio during the past decade.

That being said, a look at the bigger picture shows that Etsy's growth journey is still there. Its remarkable growth from pre-pandemic levels is a notable illustration of this. Investors may need to have some patience with this business in the coming quarters as it realigns to manage the current economic environment, but it could be a miscalculation to think that the best days for this stock are behind it.