I have a soft spot for investing in growth stocks. In my earlier years, though, I definitely shied away from this group. The stocks were incredibly volatile, the valuations were high and there always seemed to be so much controversy.
Investors would have heated discussions on message boards, the same bull-bear debates that have moved to Seeking Alpha and Twitter (NYSE:TWTR) today. It was too much for a novice like me to decipher who was right and who was wrong.
However, what I’ve learned over time is that the business matters more than the valuation. In fact, the valuation doesn’t matter… until it does.
That may not seem like a rational interpretation. But the simple truth is that growth stocks can trade with out-of-this-world valuations in comparison to traditional stocks and businesses because the growth is so high and the businesses are so strong. Throw in a low float for many of these names and the valuation seems to climb even more.
Over time, the best growth stocks grow into those valuations. Of course, that doesn’t always happen. But the trick is picking out the highest-quality names.
The other side of the equation is volatility. I have a strategy for buying growth stocks after large corrections in price. And now, after the latest dip, investors finally have another opportunity to buy many high-quality picks on the market today.
So, without further ado, here are seven growth stocks to buy now:
- Roku (NASDAQ:ROKU)
- PayPal (NASDAQ:PYPL)
- Twilio (NYSE:TWLO)
- Zoom Video (NASDAQ:ZM)
- DraftKings (NASDAQ:DKNG)
- MercadoLibre (NASDAQ:MELI)
- PagerDuty (NYSE:PD)
Growth Stocks to Buy: Roku (ROKU)
There has been some worry about Roku due to the waning effects of the pandemic. While the novel coronavirus is still an ongoing situation, it’s having a smaller impact on travel and gatherings than it has had in the past.
ROKU stock has been lumped into a group of Covid-19 stocks — and understandably so. Its business accelerated significantly due to the pandemic, with more people at home and streaming than ever before.
That said, streaming video didn’t just begin gaining momentum because of Covid-19. There was already an existing secular shift away from traditional cable providers toward streamers and Roku had tapped into that market perfectly.
So, while many naysayers will bemoan the stock price and argue Roku is “just a stick,” they couldn’t be more wrong. The company’s platform continues to drive impressive revenue growth due to signups for new services and growing ad sales.
Down about 30% from its 52-week high, this pick of the growth stocks presents value at current levels. While there may be more volatility in the coming months or quarters, the secular trend of streaming isn’t going away any time soon.
PayPal joins this list of growth stocks as the largest company in the group, weighing in with a market capitalization of more than $300 billion. Unlike Roku, PYPL stock has had a much more muted correction, currently down 12% from its 52-week high.
However, I would consider PayPal a more mature growth stock and thus, it tends to suffer from less volatility. That said, the knife cuts both ways — the upside rallies also tend to be smaller.
Regardless, this is still a high-quality company to buy on the dip.
Like Roku, PayPal is enjoying a secular trend in payments. The move from cash and checks to debit and credit began long ago and continues to move in favor of digital payments. The rise of e-commerce has also been a secular catalyst for PYPL. And of course, Covid-19 accelerated both of these long-term trends.
Further, PayPal has made several savvy acquisitions on top of introducing crypto trading to help drive growth. It may even offer brokerage services in the future. With estimates calling for more than 20% revenue growth in each of the next three years, I think this high-quality company is a safe pick to buy on the dips.
Growth Stocks to Buy: Twilio (TWLO)
Twilio is another one of my favorite growth stocks right now. When the world seemed like it was ending, the company turned in an explosive quarter, blowing away analyst expectations. While it was still well-off the 2020 pre-pandemic highs, TWLO stock enjoyed a one-day 40% rally back in early May 2020.
It’s not often you see a rally like that in a stock this size. However, customer communication has only become more important since the pandemic began and Twilio’s acquisition of SendGrid is also paying major dividends.
Before, I was long Twilio, but thought the company would be in a world of pain due to the economic contraction we were going to see as a result of Covid-19. I was as wrong as ever — and I’m grateful for that.
Estimates call for a whopping 52% acceleration in sales this year to $2.7 billion. However, expectations beyond this year are still impressive. Analysts expect 31% growth in 2022 (to $3.5 billion) and almost 30% growth in 2023. In-line results should push Twilio above $4.5 billion in sales in 2023.
While it does have a rich valuation — about 18 times 2022 revenue estimates — this is an incredibly high-quality name that’s still 20% off its high.
Zoom Video (ZM)
Now this company will be a controversial pick, because a majority of investors link this stock only to the Covid-19 outbreak. Granted, Zoom’s business was one of the biggest beneficiaries of the global pandemic because business had to go on while no one could go into the office. As such, remote meeting and conference calls became the norm and, virtually overnight, ZM stock exploded higher.
Here’s the thing about Zoom, though: this was a great company before the pandemic! A lot of people forget (or never knew) that Zoom Video already had strong growth even before the novel coronavirus changed our lives.
The company delivered top- and bottom-line beats in its first four quarterly reports as a public company (before the pandemic hit). That came with multiple upside guidance outlooks too, while 2019 revenue grew 118% versus the prior year. But the company wasn’t just continuously beating expectations and guiding above estimates — it was profitable and free cash flow (FCF) positive.
I’m sorry, but that’s a great pick of the growth stocks in my eyes. Granted, ZM’s explosive run made it hard to be long. However, with it now down more than 50% from the highs, the blow has certainly been softened for those who want to accumulate Zoom at these levels.
Growth Stocks to Buy: DraftKings (DKNG)
I have been a long-time bull on DraftKings, although DKNG stock has certainly had its share of ups and downs. Like other growth stocks on this list, the pandemic-induced shutdown in casinos helped move a lot of sports-gambling volume online.
Of course, this company is already on growth investors’ radars. Plus, the fact that DKNG continues to add new states to its platform also adds to its overall growth. A return to normal in the sports world is helping, too.
For instance, even though DraftKings added Michigan, Virginia and Tennessee several quarters ago, these states missed a bulk of the NFL football season as well as the start of many other leagues. But that’s not the case this year.
Further, as more states approve sports gambling and online gambling, DraftKings should continue to ride legalization for the next decade. As such, consensus estimates (which have been far too conservative thus far) call for revenue to go from around $600 million in 2020 to more than $2.4 billion in 2023.
Currently at 15.4 times forward revenue according to Seeking Alpha, the valuation isn’t too steep. However, there are some hurdles to consider.
First, there’s a lot of competition in this space, both from companies like FanDuel as well as traditional casino operators. Of course, so far DraftKings (and FanDuel for that matter) are doing well against their brick-and-mortar foes.
Secondly, though, the company is trying to close a $22 billion cash-and-stock deal for the United Kingdom-based Entain. While there are obvious advantages to the deal, keep in mind DKNG stock currently sports a market capitalization of just $19.8 billion.
The next pick on this list, MercadoLibre is sort of like the PYPL dip-buy in my view. With a $79.8 billion market cap right now, it is admittedly much smaller. However, if you’re looking for “more stable” growth stocks in regards to volatility, this is one to look at.
Down about 20% from the highs, MELI stock has endured most of the pain in recent trading. From early September, shares have fallen in many of the recent weeks. That said, the company is still expected to deliver. And those expectations are only climbing, even as the stock has been falling.
Coming into 2021, analysts expected MELI to do less than $4 billion in revenue this year. But estimates now sit at almost $7 billion. In each of the next two years, analysts expect more than 30% growth as well. That puts the current 2023 revenue estimate at $12.7 billion.
If that’s the case, you can bet this stock is going for a ride to the upside.
Growth Stocks to Buy: PagerDuty (PD)
Last but not least on this list of growth stocks, we have PagerDuty. This name certainly does not get the fanfare that other picks on this list often get. But that doesn’t mean it’s one to ignore.
Not only does it have a relatively reasonable valuation at 13 times 2022 revenue expectations, but the growth outlook is solid. Analysts expect almost 30% growth this year, followed by two consecutive years of some 25% revenue growth.
Like MercadoLibre, PD stock has been trending lower while revenue estimates continue to trend higher.
In its most recent quarter, PagerDuty delivered a top- and bottom-line beat and raised its full-year outlook. Its guidance for the third quarter and full year also came in ahead of estimates.
As a result, revenue estimates are at the high of the year. Yet, despite that, shares are down about 28% from the 52-week high and down about 16% from the post-earnings high after its recent quarter.
When growth stocks come back in favor, PagerDuty should as well.
On the date of publication, Bret Kenwell held long positions in ROKU, TWLO and PD. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.