2020 was an explosive year for growth stocks, as many saw several years worth of growth pulled forward into our new pandemic operating environment. It resulted in many stocks doubling, tripling, quadrupling or even more.
Coming into 2021, many of these names were hitting new highs and investors were feeling empowered. This brazen attitude didn’t do too well once things started to break down, though.
Many growth stocks quickly fell into a bear market, which lasted until early May. We were lucky to have caught the bottom, as many of these stocks enjoyed a strong rebound.
However, call it a second bear market or simply a big dead-cat bounce within the first one, but growth stocks are back in serious pain. Let’s look at the high-quality ones worth buying. I love accumulating high-quality businesses on deep declines. Below are seven growth stocks to buy in 2022:
- Roku (NASDAQ:ROKU)
- Upstart (NASDAQ:UPST)
- Twilio (NYSE:TWLO)
- PagerDuty (NYSE:PD)
- Cloudflare (NYSE:NET)
- Snap (NYSE:SNAP)
- Pinterest (NYSE:PINS)
Growth Stocks to Buy: Roku (ROKU)
While I would be the first to point out the secular growth opportunity in streaming video, Roku bears will point out the potential competition from Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Amazon (NASDAQ:AMZN).
However, that threat has always loomed for a while now. Amazon Fire TV, Google Chromecast and the Apple (NASDAQ:AAPL) TV have been in play for years. And you know what? The biggest mistake by Alphabet or another company was not acquiring Roku, because it dominates the space.
That’s evident in its top-line growth, where it boasts revenue expectations of 57% growth this year. Beyond that, estimates call for 36% growth next year and 31.5% growth in 2023.
Further, Roku generated 18 billion hours of streaming last quarter, up 21% year over year. Active accounts climbed too, up 23% year over year to 56.4 million customers.
While many would have expected “peak streaming” to have occurred in Q2 and Q3 of 2020 (when we were at peak Covid lockdowns), that hasn’t been the case.
As the world continues to shift to streaming video, Roku should continue to drive its platform hours, active users and platform revenue. Still down more than 50% from the highs and Roku is a reasonable stock to begin accumulating.
Like Roku, Upstart is down massively with the stock roughly 60% below its all-time high from October. Even after the company delivered a top- and bottom-line earnings beat and upside guidance in November, the stock was hammered, falling 18% the day after it reported.
What else could the company have done?
When we really look at Upstart stock, we see a high-quality company that’s simply been swallowed up in the high-growth selloff.
Over the past year, the company has seen consensus expectations for revenue and earnings explode higher for 2021 and 2022. What happens to the stock price is out of management’s control, but eventually this type of growth is rewarded.
It helps that Upstart is profitable and cash flow positive too, while revenue estimates call for growth of 250% this year, 45% next year and 26% in 2023. For all we know though, the out-years are still too conservative.
In any regard, this stock could very well see a bounce in 2022, as investors start to pick over the scraps of the growth-stock graveyard.
Growth Stocks to Buy: Twilio (TWLO)
I can’t believe the action we’ve seen in Twilio. Well, I take that back — I can believe the action we’ve seen because the market is selling almost anything related to growth. For the most part, it doesn’t matter if the quarter was good, great, bad or downright ugly.
However, my temporary disbelief to Twilio’s current action is simple: Investors are being controlled by a simple pattern!
The company has a tendency to report blowout results, crushing analysts’ expectations. Its business is robust, with strong top-line growth and impressive dollar based net retention (DBNR) — essentially how much growth it generates from current customers.
In other words, Twilio has a very “sticky” business and not one that customers can easily drop or switch for a competitor. That’s important. As communications between businesses and customers increases, so too does Twilio’s business. As it adds other mediums — like email — it continues to build a larger moat.
So what is this simple pattern?
Well, the company tends to guide conservatively on earnings (not revenue) and each time, the stock sells off as a result. This is simply a façade though, as Twilio stock eventually comes back to life and everyone who sold feels like a fool.
Down 48% from the high at its recent low and Twilio is a high-quality but beaten-down growth stock ripe for accumulation.
PagerDuty recently reported a strong quarterly result, which at least for a moment, sent the stock higher. Following the result, shares rallied almost 18% in a two-day span from Dec. 6 to the 8th, but gave up most of the gains in the following sessions.
That’s despite the company delivering a top- and bottom-line beat and providing above-consensus guidance.
I don’t know when the bear market in growth stocks will end, but I do know that PagerDuty should come roaring back to life when it does. The company simply continues to deliver top-notch results, while providing a fantastic business.
Essentially, spend $X with PagerDuty and it will save you multiples of that figure in efficiencies. There’s more to it than that obviously, but that’s the bottom-line pitch its sales team has been using for a while now.
When one sees the results firsthand for their business, why wouldn’t they use them? And its current customers speak volumes, as the company’s DBNR is through the roof. In other words, current customers continue to generate robust growth. That says a lot about the quality of PagerDuty’s business.
Growth Stocks to Buy: Cloudflare (NET)
It looked like Cloudflare was one of the few growth stocks that was going to escape the bear market. A favorite among growth investors, Cloudflare hit new all-time highs in mid-November.
Now just a month later and we’re looking at a stock that’s down 40%. The selling has been unbelievable.
However, it’s important to either have a go-to list of stocks you want when the market finally turns higher or a list of stocks that you will begin accumulating during the major corrections.
The risk to both groups is obvious and we can take Cloudflare as the example.
Conservative investors who wait for the turn risks leaving a huge amount of money on the table as the reversal can be incredibly fast. Plus, those who wait long, turn higher risk, having a high cost basis and then watching the stock roll back over. On the flip side, investors who opt to start accumulating could see Cloudflare fall by another 20% or 30% before it ultimately bottoms.
At some point though, Cloudflare and its peers will be back. You can only keep a stock like this down for so long. Analysts expect 50% revenue growth this year, 36% growth in 2022 and 32% growth in 2023. That growth eventually leads to higher stock prices, even when times seem dark.
Snap is a stock that I have been tough on in the past. The founder and CEO Evan Spiegel wasn’t doing enough to leverage the brand and Snap shareholders were suffering as a result.
The company’s financials were not that strong and free cash flow was bleeding. Its margins were disappointing too.
But now it seems to be one of the few social media platforms that actually has solid user growth. While I would love to see stronger margins with Snap and increased profitability, that could come down the road.
The company did hit a snag with Apple’s new privacy settings and while that is an issue that could prove to persist for more than one quarter, it’s likely to be a short-term problem in the grand scheme of things.
Still, analysts expect Snap to go from about $4 billion in sales this year to more than $8 billion in 2023. If that happens, the stock will likely be higher than current levels in 24 months. Sometimes it’s just as simple as that.
Growth Stocks to Buy: Pinterest (PINS)
For a bit more complicated of a social media pick, we have Pinterest. Pinterest seems like the odd one out in the group, though.
It has terrific growth, strong profitability and a good balance sheet. The company is well-situated in the e-commerce space with its platform too. However, Pinterest also has a user growth problem.
Simply put, Pinterest went from strong user growth during the pandemic to poor growth over the last two quarters. Those staying home and working on projects turned to Pinterest for inspiration. It’s not weird that after a disruptive year full of lockdowns (and during the summer no less) that engagement and user growth fell. With the winter months ahead of us and a surging omicron variant in the mix, perhaps user growth will climb once again.
However Wall Street very well could discount that observation for the simple fact that user growth may retreat once those restrictions lift again.
That said, the stock is likely worth a look after a 60% beating from the high.
The company has the best margins in the social media space, behind only Meta (NASDAQ:FB). Revenue continues to chug in the right direction, it’s actually profitable and after the selloff, the valuation isn’t all that bad.
My biggest issue with Pinterest? It’s judged as a social media company, but it’s arguably not social at all. It’s effectively a visual search engine, more related to Google rather than Snapchat, in my opinion.
On the date of publication, Bret Kenwell held a long position in ROKU, PD, SNAP and PINS. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.