This bear market has not been easy and it’s taken a particular toll on growth stocks. In fact, this group has been hit the hardest when we’re looking at the equities market. However, despite this recent underperformance, it shouldn’t stop investors from looking at top growth stock picks for 2023.
Many of the stocks in this group are down 60% to 80% (or more), so they’ve paid the price for being overvalued. However, many of these companies still operate strong businesses in industries with solid, long-term growth.
During periods of extreme bull market rallies or extreme bear market declines, valuations tend to play a very small role in a stock’s fundamental performance. Even if these stocks become attractively priced, they may continue to fall if the market remains in a “risk-off” state.
At some point though, investor sentiment will shift to “risk-on,” and the market’s attitude toward growth stocks will be different.
Let’s look at a handful of top growth stock picks for 2023, with the hopes that this transpires.
|TTD||The Trade Desk||$47.45|
The Trade Desk
The Trade Desk (NASDAQ:TTD) is an excellent company that continues to find ways to impress investors. But should investors be concerned?
I think perhaps they should.
Shares are currently 55% off recent highs, and have been down as much as 65% at one point. Obviously, retailers are spending quite a bit on digital advertising at the moment, as we’re in the holiday quarter. But if we do fall into a recession in 2023 (even a mild one), we could see retailers and other companies pull back on digital advertising spend.
That will negatively impact The Trade Desk, although it’s a company I like very much. That’s because the long-term trends in the digital ad realm remain favorable for The Trade Desk. Additionally, this is a company with a solid and dependable business model, something I like.
When the company reported earnings on Nov. 9, it delivered a top- and bottom-line earnings beat. However, its fourth-quarter guidance was a little light. That said, analysts still expect 20%-plus revenue growth for The Trade Desk in each of the next three years. Further, this company is profitable, which is a feather in the cap of most bulls right now.
The bottom line: investors may want to look at this stock if shares revisit 2022 lows.
Like The Trade Desk, DigitalOcean (NYSE:DOCN) is one growth stock to keep an eye on. Also like The Trade Desk, this company is profitable, even on a GAAP basis. It’s also free cash flow positive.
While the company’s underlying business continues to do well, investors just aren’t buying it — literally.
Shares of DOCN stock are down nearly 80% from their high, and continue to struggle. By looking at the price action with this stock, most wouldn’t think DigitalOcean delivered a top- and bottom-line beat with strong guidance back in early November.
Most investors also wouldn’t expect estimates to call for 34% revenue growth this year, 29% growth next year and strong growth in out-years. If these expectations actually come to fruition, DigitalOcean will surpass an annual revenue run rate of more than $1 billion sometime in 2024.
It may take a while, but this sort of growth and free cash flow leverage will be rewarded by Wall Street. It’s a question of “when,” not “if.”
Last but not least, we have Elastic (NYSE:ESTC). Like most growth names, this stock has been crushed, with shares down more than 70% from their highs.
Like the others on this list, long-term estimates for Elastic are bullish. Analysts expect 24%-plus annual revenue growth through FY 2025. Elastic is operating near break-even this year, but is forecasted to turn profitable in FY 2024 (next year).
The company is halfway through its FY 2023 and just delivered a top- and bottom-line earnings beat. The bottom-line effort was enough to generate break-even results. Management said, “In Q2, we exceeded both our revenue and profitability targets, demonstrating the operating leverage inherent in our business model.”
I liked that comment as operational leverage does tend to be rewarded over the long-term. While the company’s valuation will likely continue to be volatile in the near-term, at least it’s difficult to call ESTC stock overly-expensive, as it trades at less than 5-times this year’s sales.
On the date of publication, Bret Kenwell held a long position in DOCN and TTD. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.