Since the beginning of this year, growth stocks have seen a spectacular run-up after a bloody 2022. Though the anticipated recession and interest rate hikes will make growth stocks riskier, truly good growth companies will always be rewarded and outperform during recessions. Below are three companies I expect to continue growing, no matter the macroeconomic environment.
SoFi Technologies (SOFI)
SoFi Technologies (NASDAQ:SOFI) provides financial services that mainly serve younger demographics. It offers financial services such as loans, investments, insurance and credit cards, all without a physical branch.
In the past month, SoFi has seen its stock tank by more than 18% as recession fears and the aftermath of multiple bank failures have spooked investors. Fundamentally, the company is experiencing strong growth. In its most recent earnings, revenue increased 43% year-over-year to $460 million.
Early last year, SoFi acquired a bank charter that allows it to use customers’ deposits to make loans. Since then, deposits have grown rapidly to $10 billion in the recent quarter, up nearly 37% from the previous quarter. This gives SoFi a huge competitive advantage over its fintech peers, as it lowers the cost of funding. This in turn helps SoFi cut costs and offer competitive interest rates to its members. This was evident, as Q1 2023 operating margins were -7.8% compared to -34.5% a year ago. Furthermore, 97% of the company’s deposits are FDIC-insured by up to $2 million, which provides strong protection against a deposit flight.
Finally, the median FICO scores of new depositors at SoFi has maintained at 730. Furthermore, the company has a strong proprietary algorithm with access to over 5 million members’ data to identify creditworthiness. Overall, SoFi is a stock that has solid fundamentals but has been sold off due to bad market sentiment and thus deserves to be on investors’ watchlists.
Toast (NYSE:TOST) is a company that helps restaurants digitize, offering cloud-based systems for taking orders, managing menus, online ordering and customer management.
The market for Toast is likely to grow at a compound annual growth rate (CAGR) of 16.3% between 2023 and 2030. This is further proven by Toast’s reach, which saw 40% YOY growth in store locations. Furthermore, with fewer than 10% of U.S. restaurant locations utilizing the Toast platform, there is still a long runway for future growth.
At the same time, TOST is continuing to improve its operating margins. In 2019, they were at -32%. In 2020 they were at -27% and then in 2021 made a big jump to -13%. The company is set for net profit by the end of 2024.
Toast stands out in the market due to its vertical integration. For example, as customers start using digital ordering solutions, restaurants can collect guest data. Toast then uses this data with its marketing solutions to drive guests to the restaurant. This enables TOST’s high switching costs, as 65% of customers use four or more of TOST’s solutions, and 41% use six or more.
A potential risk is that a recession causing low consumer spending will affect new restaurant openings and churn rates. Still, I believe that TOST would largely be able to withstand a recession because its product is so entrenched in the restaurants’ operations. Ultimately, it helps businesses save time and money. Overall, TOST remains the top choice in a fast-growing restaurant management industry and has very exciting growth potential.
Wix.com (NASDAQ:WIX) is a cloud-based web development service that allows users to create sophisticated websites through simple drag-and-drop tools. Wix is popular due to its powerful features and user-friendly interface, allowing both professionals and beginners to create top-notch websites. Its primary market is the website builder industry, valued at $62 billion, according to Wix’s estimation. However, Wix’s inclusion of e-commerce and creative agency services has expanded its total addressable market (TAM) to $211 billion.
The company forecasts to achieve the “rule of 40” in FY 2025, which is when a company’s revenue growth rate and EBITDA margin exceed 40%. This is commonly used to help measure tradeoffs between growth and profitability. The rule most commonly applies to smaller, fast-growing companies, so it is remarkable to hit that mark once growth has slowed.
In Q4 2022, revenue was up 6% YOY, pretty much in line with estimates. For FY 2023, the company expects 9%-11% revenue growth YOY. WIX functions in a market of high recurring customers, as they renew subscriptions to keep their websites public. The revenue should hold steady as evidenced by their 50% decrease in advertisement spending but still maintaining steady bookings.
Overall, the company is still yet profitable, experiencing a GAAP net loss of $39 million last quarter. Despite that, WIX is certainly moving to the path of profitability, effectively cutting down costs while expecting revenue to grow. WIX expects its cost-efficient measures to save an additional $50 million for 2023 and is confident in its ability to achieve the “rule of 40.” Investors should keep Wix on their watchlists, as it has immense growth potential and is on track to be profitable.
On the date of publication, Michael Que did not hold (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.