Many growth stocks were crushed over the past year as rising interest rates drove investors toward more conservative investments. However, that retreat has also created some lucrative buying opportunities for patient investors.
I believe these three out-of-favor growth stocks -- Fortinet (FTNT 0.23%), DigitalOcean (DOCN 3.30%), and Rivian Automotive (RIVN 6.10%) -- are still no-brainer buys in this challenging market.
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1. Fortinet
Fortinet is one of the world's largest cybersecurity companies. Its "Security Fabric" provides end-to-end security tools for on-premise, cloud-based, and Internet of Things (IoT) devices to more than 680,000 customers worldwide -- including most of the Fortune 500. That ecosystem blossomed from its first product, its FortiGate next-gen firewall, over the past two decades.
Fortinet differentiates itself from its competitors by developing its own custom ASIC chips for its own hardware and FortiOS operating system. It claims that approach makes its products faster, more power efficient, and more reliable than other cybersecurity appliances that use off-the-shelf chips.
Fortinet's revenue rose 20% in 2020, 29% in 2021, and 32% in 2022. This year, it expects its revenue to grow 21%-23% as macro headwinds force companies to rein in their spending. That guidance wasn't too grim, but it caused the stock to drop more than 20% over the past month. Some investors also questioned management's goal of generating $8 billion in revenue by 2025, which would require a compound annual growth rate (CAGR) of 22% over the next three years.
That slowdown is certainly disappointing, but Fortinet now looks historically cheap at 35 times forward earnings. It's also one of a handful of cybersecurity companies that remain consistently profitable by both generally accepted accounting principles (GAAP) and non-GAAP measures -- so I believe it's still a great long-term investment.
2. DigitalOcean
DigitalOcean operates a cloud infrastructure platform for smaller businesses. Unlike Amazon (NASDAQ: AMZN) Web Services and Microsoft (NASDAQ: MSFT) Azure, which both primarily serve large enterprise clients, DigitalOcean serves up smaller "droplets" of individual servers at lower prices. Its recent acquisition of the cloud startup Paperspace also adds GPU-powered AI processing tools to its offerings.
The bears believe AWS, Azure, and other cloud giants will render DigitalOcean obsolete by rolling out similar tools for smaller clients, but that hasn't happened yet.
Instead, its revenue rose 25% in 2020, 35% in 2021, and 34% in 2022 -- even as the broader cloud market faced tough macro headwinds. DigitalOcean's net dollar retention rate stayed above 100% during all three years, while its adjusted margin on earnings before interest, taxes, depreciation, and amortization (EBITDA) expanded from 30% in 2020 to 34% in 2022.
The stock plunged 45% over the past month after management lowered full-year revenue guidance to 18%-19% growth, warned that its net dollar retention rate would dip below 100%, and admitted it made a few minor accounting errors. But after that pullback, DigitalOcean now trades at just five times this year's sales. Investors who buy this fallen stock today could be well-rewarded once the macro environment improves, its retention rates stabilize, and it rectifies its accounting errors.
3. Rivian Automotive
Rivian still trades about 70% below its IPO price from November 2021, and it's the only electric-vehicle stock I'd buy without hesitation for a few simple reasons: It's already ramped up its production; it isn't running out of cash; its top backer, Amazon, is still sticking around; and it's fundamentally cheap.
Rivian sells three types of vehicles: the R1T pickup truck, the R1S SUV, and a custom electric delivery van for Amazon. Rivian's production of 24,337 vehicles last year narrowly missed its own target of 25,000 vehicles, but it expects to more than double production to 52,000 vehicles in 2023.
Rivian expects to manufacture more vehicles as its ramps up the production of its in-house Enduro drive unit, which reduces its reliance on third-party powertrains, strengthens its own supply chain, and lowers its total production costs. Thanks to those improvements, the company expects to narrow its adjusted EBITDA loss from $5.2 billion in 2022 to $4.2 billion in 2023. It won't achieve GAAP profitability anytime soon, but it still had $11.3 billion in liquidity at the end of the second quarter.
Rivian is still a speculative stock, but its enterprise value of $17 billion also makes it a bargain at four times this year's sales. That's probably why Amazon hasn't been eager to liquidate its shares. Investors who buy and forget Rivian today might reap some big multi-bagger gains over the coming decades.
