7 Explosive Growth Stocks Ready to Stomp Valuation Compression

growth stocks - 7 Explosive Growth Stocks Ready to Stomp Valuation Compression

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We’re almost two months into 2022, and it has not been a smooth journey for the stock market. At the time of writing, the S&P 500 has dropped 8.3% since the beginning of the year. The market appears to be in a solid downward trend, and investor sentiment is relatively low, at least compared to last year. It’s certainly reduced sentiment around growth stocks.

There are a number of reasons for this. Of course, top of mind is the Russian invasion of Ukraine this past week. This geopolitical event is perhaps one of the most notable historical events in some time, and has rocked the market with uncertainty. On top of this, expectations that the Federal Reserve will hike rates at most (if not all) of its meetings this year has led to a rather dim view of growth stocks.

That certainly makes sense. As interest rates rise, so too does the discount rate used to discount future cash flows to the present. Additionally, until inflation subsides, expectations are that this interest rate hiking cycle could continue for some time.

This situation has already compressed valuations. The fear is that growth stocks could continue to get discounted, as this hiking cycle unfolds.

Time will ultimately tell how valuations will perform over the medium-term. However, for those looking for top-notch growth stocks that have the ability to outperform in this environment, here are seven top stocks to choose from.

  • Amazon (NASDAQ:AMZN)
  • Salesforce.com (NYSE:CRM)
  • Alphabet (NASDAQ:GOOG, GOOGL)
  • Zoom (NASDAQ:ZM)
  • ServiceNow (NYSE:NOW)
  • Microsoft (NASDAQ:MSFT)
  • Shopify (NYSE:SHOP)

Top Explosive Growth Stocks: Amazon (AMZN)

Amazon (amzn) LOGO ON THE SIDE OF A BUILDING.
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One of the most explosive growth stocks over the past two decades, Amazon remains a top choice of many long-term investors. This company’s growing market share in the booming e-commerce space has provided some of the strongest secular growth in recent history. Accordingly, this company’s sky-high valuation for many years has turned out to be justified.

Right now, Amazon remains one of the highest-valuation stocks of its mega-cap peers. That said, with a valuation of “only” 47-times earnings, Amazon’s valuation multiple has certainly come a long way from years past. Formerly a stock that was valued mostly on a price-to-sales basis, Amazon’s surging earnings now provide a fundamental reason to own this stock.

In fact, the company’s recent Q4 earnings blew the market away. Every single analyst estimate missed the mark, with the company reporting net income that nearly doubled year-over-year. These results were driven by strong advertising revenue growth of 32% and the inclusion of the company’s Rivian (NASDAQ:RIVN) investment in its overall numbers.

Over time, investors expect to benefit from Amazon’s rising importance in key growth areas such as cloud computing, electric vehicles and AI. This isn’t just an e-commerce company anymore. Thus, there are multiple ways to look at Amazon, but most angles lead back to the same conclusion — this is a top-notch long-term growth stock to buy and hold.

Salesforce.com (CRM)

A hand with pink painted fingernails holds a Salesforce (CRM) sticker.
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In the crowded industry of customer relationship management, Salesforce.com is the dominant leader. This California-based company provides services and applications for marketing automation, analytics, customer sales, etc. With its services, companies are able to maintain a loyal customer base and build their businesses further.

Despite having a first-mover advantage, shares of Salesforce.com have dipped more than 20% over the past six months. Much of this has to do with the macro environment right now. The threat of surging inflation and rising interest rates is not bullish for companies like Salesforce.

However, investors looking for long-term subscription-based revenue models may want to take a look at CRM stock. Indeed, this company was responsible for approximately 20% of the global CRM market in 2020. Looking forward, assuming this market share holds somewhat stable, growing demand for CRM products should provide a steady baseline for long-term growth.

Expectations are that Salesforce.com could hit $50 billion in revenue by 2026, if the CAGR metrics of this sector shape up. Thus, this company’s prospects warrant a hard look from investors right now.

Top Explosive Growth Stocks: Alphabet (GOOGL)

letters spelling out google
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These past few months have been ones that could be best described as solid for Alphabet. The parent company of Google and YouTube, Alphabet recently posted impressive Q4 earnings. The company brought in $75 billion in revenue this past quarter, showing 32% year-over-year growth. This growth rate, for a company of this size, is noteworthy. Accordingly, Alphabet’s valuation multiple of only 24-times earnings may be seen as cheap, given this implies a trailing PEG ratio of less than one.

However, these earnings have also garnered a lot of attention of late for an intriguing reason. Along with the company’s Q4 earnings release, Alphabet announced it would be splitting its stock 20:1.

Stock splits don’t generally matter from a fundamentals perspective. However, for retail investors looking to buy more shares of a given company for the same dollar value, this can entice a broader investor base. Accordingly, such splits are often viewed positively by investors, and sent GOOGL stock soaring following these numbers,.

Since then, GOOGL stock has ebbed and flowed, mostly moving in line with the larger indices. With so much uncertainty in the market, it’s unclear how Alphabet will perform over the near-term. However, should more substantial dips materialize, long-term investors may want to jump at the opportunity to get GOOGL stock on the cheap – it doesn’t happen very often.

Zoom (ZM)

A woman sitting at a desk waves at a large number of people on the videoconferencing software Zoom (ZM).
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Perhaps one of the more speculative names on this list is Zoom. A company that has seen gargantuan growth driven by the pandemic, Zoom has found a way to take the lead in a growing industry in a very short amount of time. (Remember Skype?)

However, investors have certainly trimmed their expectations for this growth stock. The once-highly-valued ZM stock has given up approximately two-thirds of its valuation over the past six months. since its peak, that number is more like 80%. That’s not a good trend for this growth stock.

However, there’s certainly a view that’s starting to build that, while growth may slow for Zoom, this company’s position in its fast-growing market is worth considering. Zoom is still growing and adding more paid accounts. As the company is able to monetize its market share, there’s significant profitability growth that’s likely to come. Of course, the question is how long this will take.

Perhaps interest rates will rise materially, and valuation multiples will come down further. However, those looking for a beaten-down high-growth tech stock with the potential to grow its way out of this valuation compression environment may want to look at Zoom. I think this company has a shot.

Top Explosive Growth Stocks: ServiceNow (NOW)

service now sign logo on a building
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The future potential of Alphabet and Amazon depends on their cloud computing businesses, which indicates how fast-growing this industry is. ServiceNow taps into this market and is famous for developing cloud computing platforms.

ServiceNow operates with a high-margin subscription-based business model. This company provides its services to 80% of the Fortune 500 companies. On top of that, an impressive 1,359 customers are on an annual contract worth over $1 million.

Like other value compressed stocks, NOW has also suffered from decreasing stock prices, despite tremendous earnings. The stock is trading almost 20% below its 52-week high. However, when most companies lost business during the pandemic, the financials of ServiceNow remained relatively unfazed.

In its most recent quarter, this company reported a 29% year-over-year increase in net sales, reaching $1.6 billion. Its operating income grew 25%, and earnings-per-share ended the year at $5.92. Furthermore, with a renewal rate of 99%, investors can be sure that ServiceNow is going to phase out any competition.

Microsoft (MSFT)

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With a market cap of $2.2 trillion, Microsoft is the world’s largest software company. Nonetheless, Microsoft is yet another stock which has felt the pain of valuation compression of late. That said, despite a valuation multiple that has come down, Microsoft’s earnings have pushed this stock back up.

Recently, Microsoft released its second-quarter results that easily surpassed all estimates. Its revenue rose 20% year-over-year to $51.7 billion, exceeding estimates by $910 million. The company’s cloud segment, Azure’s revenue, also grew 46% year-over-year. Furthermore, MSFT attracted numerous investors with a reported EPS of $2.48.

What I continue to focus on with Microsoft are three things. First, the company continues to provide strong forward guidance. Second, Microsoft has an absolutely massive moat around its core businesses. Third, this is a company that also pays dividends. For every investor type, there’s something to like about this stock.

Over the long-term, I think Microsoft has a number of growth sectors that are still relatively unexploited the company can go after. Accordingly, this remains a top long-term growth pick of mine for investors worried about valuation compression.

Top Explosive Growth Stocks: Shopify (SHOP)

Shopify (SHOP) logo on a smartphone which is next to a miniature shopping cart and miniature cardboard boxes
Source: Burdun Iliya / Shutterstock.com

Last but certainly not least, we have Shopify.

Shopify’s valuation multiple, like many companies on this list, has come down considerably in recent years. While market forces caused some of this compression, much of this valuation multiple contraction came from the company’s extremely strong earnings growth.

On Feb. 16, Shopify announced its fourth-quarter and full-year earnings, which mesmerized many investors. The company’s quarterly revenue rose 41% to $1.38 billion. This took the company’s total fiscal year revenue to $4.6 billion, representing an increase of 57% year-over-year.

What could be a game-changer for this e-commerce giant is its partnership with JD.com (NASDAQ:JD) to sell its goods in China. Through this partnership, Shopify has the potential to integrate its platform within the Chinese market, thought to eventually become the world’s largest e-commerce market.

But let’s not get ahead of ourselves. For now, Shopify’s growth rate is slowing. Certainly, there are concerns about this company’s valuation, given how fast it’s run.

However, for those bullish on the long-term growth trajectory of e-commerce within the small and medium sized business segment, Shopify is a great long-term pick.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.


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