In case you haven’t noticed, the U.S. economy is in a technical recession.
I could point to any number of indicators to prove it to you. How about the fact that The Conference Board’s Consumer Confidence Index has dropped 25% over the past few months? That’s a big decrease. It’s also very rare. Historically speaking, falls like that only happen as the U.S. economy plunges into a recession.
Or how about the fact that new home sales in the U.S. have fallen a rather sharp 40% over the past few months?
That, too, is a large and rare drop in home sales consistent with what happens during recessions.
In fact, there’s never been a time when home sales dropped that much and we didn’t fall into a recession.
We could also talk about the yield curve, which many market observers believe is the best predictor of an economic recession.
The theory is that when the 10-year Treasury yield flips below the 2-year, the U.S. economy is doomed for a recession. Pundits of this theory point out that not all yield curve inversions have led to recessions.
There have been a few “false positives.” But those fake-outs happen with shallow yield curve inversions. Whenever it deeply inverts, the U.S. economy always falls into a recession.
And today, we have a deep yield curve inversion.
I have a dozen more indicators to tell you about and a dozen more charts to show. But I don’t think I need to go any further.
You get the point.
The data is ugly – really ugly. And according to it, the U.S. economy is heading into a recession, or it may already be in one.
That’s the bad news. Here’s the good news: Recessions actually create tremendous buying opportunities in growth stocks.
They aren’t apocalypses. Let’s throw that idea out right now. Recessions don’t mean the end of the world. They just mean the economic universe slows down. When it does, most things in that universe move very slowly. But some things keep moving very quickly.
During recessions, you want to invest in those things that remain fast-moving in an otherwise slow world.
And those are secular growth stocks. I’m talking businesses with such strong growth drivers that even when the world around them slows, they maintain vigorous demand.
And in each recession, those group of stocks changes. In the early 1990s, it was PC stocks. PC makers like Microsoft (MSFT) and Apple (AAPL) sold a lot of product, despite a recession, because everyone kept buying the new devices that would change their lives – even if their spending elsewhere dropped.
In the early 2000s, it was internet stocks. Internet application providers like Amazon (AMZN) made a lot of money in the 2001-02 recession because everyone continued their pivot toward e-commerce – even if their spending at physical stores dropped.
In the wake of the 2008 financial crisis, it was cloud stocks. Cloud service providers like Salesforce (CRM) saw demand soar in 2008-09 because companies sought to leverage the cloud to cut costs – even as they cut back spending on everything else.
Every time a recession hits, a certain group of stocks soars because that group is supported by such strong growth drivers that it can grow right through the downturn. In response, investors throw all their money into those stocks, and their prices skyrocket.
Simple enough, right? The million-dollar question: What are those stocks in 2022?
Let’s find out. Here are 10 of my favorite growth stocks to buy to power through a 2022 recession.
#1 UiPath (PATH)
UiPath (PATH) is an enterprise software automation company that is making AI-powered software robots to automate business processes.
The company’s core platform constitutes an army of these robots that leverage AI-based computer vision to perform a vast array of actions as a human would when performing business processes. These actions include but are not limited to logging into applications, extracting information from documents, moving folders, filling in forms, and updating information fields and databases.
These software robots are deployed to complete such tasks. Throughout their lifecycle, they increasingly learn from and replicate workers’ steps to optimize the automated workflow and complete tasks more quickly and cost-efficiently.
As of the third quarter of fiscal 2022, the company has 9,630 customers and over $800 million in annually recurring revenue.
UiPath went public via an IPO in April 2021. And it’s worth about $15 billion today.
If localization is to replace globalization, companies will have to figure out how to reduce local production costs. Enterprises globalized in the first place because labor in Asia is cheaper than labor in the U.S. If those companies localize production without making any cost-saving changes, their production costs will balloon, and their profit margins will get destroyed. Companies will not let that happen.
Therefore, we believe the anti-globalization trend will be accompanied by an automated localization trend. That is, companies will look to localize production and work where the labor can be automated — and therefore, the associated labor costs can be eliminated. Automated localization is the only way companies can cost-effectively execute de-globalization.
We expect demand for and investment in hardware and software that automates businesses processes and functions to meaningfully accelerate in 2022-23.
UiPath is the leader in software-driven automation. Indeed, Gartner has – for three straight years – recognized UiPath as the leader in the robotic process automation industry.
The company is growing very quickly already, without the de-globalization tailwind. Trailing 12-month revenues have grown at a 65% compounded annual growth over the past seven quarters.
This is a very high-margin business, with 85%-plus gross margins that allow for a very scalable business model and huge profit production at scale.
The stock is quite cheap, trading at just 14X forward sales for what is durable 30%-plus revenue growth potential over the next several years.
Now, this is still an expensive stock if you ignore the growth profile. Therefore, UiPath does need to grow very quickly to justify its current valuation. The company is unprofitable and will likely remain so for the balance of this year. And competition is heating up, and UiPath’s competitive moat has yet to be proven as a viable one.
Revenues this year will hit $900 million. Assuming 25% growth per year over the next 10 years, revenues will track toward $8.4 billion.
With an 85% gross margin profile, UiPath should be able to net somewhere close to 45% operating margins at scale.
The combination of $8.4 billion in revenues with 45% operating margins implies net profit potential of ~$3 billion, assuming a 20% tax rate.
Application software stocks like this have – since 2014 – averaged a 35X forward earnings multiple.
A 35X multiple on $3 billion in net profits implies a potential future valuation of $105 billion for the company.
UiPath is one of our favorite long-term growth companies in the world today. It is the market’s highest-quality pure play on labor automation, a trend we believe is both powerful and inevitable. And the power and inevitability of that trend will only be exacerbated by anti-globalization rhetoric. Therefore, we think UiPath stock is a long-term winner with a big near-term catalyst. That’s a powerful combination.
#2 Cloudflare (NET)
Cloudflare (NET) is a network security company that specializes in developing software tools that companies use to collectively secure the internet. Those include, among other things, content delivery networks and web application firewalls.
Specifically, as a content delivery network (CDN), the company connects users to websites securely and rapidly via its global network of datacenters. More than a quarter of all websites on the internet are secured by Cloudflare, while around 10% of global internet traffic passes through Cloudflare’s network.
The company is widely considered a leader in network security and operates at massive scale.
Cloudflare has a presence in over 270 cities across the globe. That means its datacenters are within 50 milliseconds of 95% of the world’s population. Total customers topped 154,000 last quarter. Revenues have grown at a 51% compounded annual growth rate since 2016. They’re expected to clock in at $960 million this year, up a very healthy 46% year-over-year.
Cloudflare went public via an initial public offering in 2019. Since then, the stock has both surged and crashed. It now trades at its lowest price since late 2020.
The company is currently worth about $13.5 billion.
It’s leading in a secular growth space. Cybersecurity spending is expected to increase at a steady 10%-plus pace for the next decade, with a lot of that growth powered by hybrid CDNs.
The company has some durable competitive advantages through its large scale and innate network effects – data gathered from its vast CDN is used to inform security protocol.
New customer growth is robust. And net-dollar retention rates are consistently north of 120%, meaning that current customers are very happy with the platform’s performance.
Gartner reviews for Cloudflare are very strong.
The company’s software operating model is very compelling, as it features near-80% gross margins with room for target operating margins of 20%-plus.
Operating losses are narrowing with each quarter. Cloudflare even swung to a profit last quarter, and it expects to be cash-flow positive by the second half of 2022.
The balance sheet is rock-solid, with over $1.7 billion in cash and equivalents.
The valuation is highly attractive, with the stock trading at just 14X forward sales for what’s likely a 30%-plus revenue grower with huge profit margins.
Web security is tricky, and the industry is full of viable competitors that could upend Cloudflare’s value prop. Indeed, Big Tech firms, who generally deploy their own CDNs, could obsolete Cloudflare in the long run. The valuation still isn’t “washed out,” as 14X forward sales is still pretty expensive for this market.
Analysts are calling for $960 million in revenue this year.
Into 2030, we see ~35% annualized revenue growth as realistic.
That puts 2030 revenues at $10.5 billion.
Long-term financial targets include ~80% gross margins with ~20% profit margins.
That puts profits at $2.1 billion by 2030.
An industry-average 35X multiple on that implies a 2029 valuation target of nearly $75 billion.
Bear markets always offer investors the opportunity to buy high-quality stocks at big discounts. And Cloudlfare is the perfect example of this dynamic. Let’s take advantage of this moment.
#3 Okta (OKTA)
Okta (OKTA) is a hypergrowth company focused on creating a new generation of “identity security.”
In short, it leverages identity-centric security measures to protect an enterprise’s workflow.
We believe it’s best to frame this as a “castle” versus “armor” analogy. Traditional cybersecurity systems are designed as castles to be built around an enterprise’s workflows, data, and employees. Okta’s identity security solutions are designed as armor that can be outfitted for every person in an enterprise so that the individual, their data, and their workflows are secure, regardless of where they are working.
To accomplish this, Okta has created the Identity Cloud. It leverages multiple novel technologies to ensure that the right person in an enterprise has secure access to the right applications at the right time.
Okta’s Identity Cloud solution is location-agnostic. By ensuring identity, it allows employees to securely access any application from any place. Thus, Okta’s Identity Cloud represents what many believe to be the new standard in cybersecurity for a work world that’s becoming increasingly remote and decentralized.
Having grown revenues at a 40%-plus annualized clip for several years, Okta is one of the fastest growers in the cybersecurity market today. This is also a very high-margin business (70%-plus gross margins) with enormously positive cash flows.
Okta went public via a successful initial public offering (IPO) in 2017. The stock was a growth darling on Wall Street from 2017 to 2021. Over the past six months, however, shares have collapsed at the hands of higher interest rates.
Okta is currently worth about $16 billion.
The cybersecurity industry is due for enormous growth over the next several years. Prior to the Russo-Ukrainian conflict, industry experts believed global cybersecurity spending would grow by anywhere between 10% and 15% per year throughout the entire 2020s. This conflict will likely accelerate that growth trajectory. We believe global spending will grow by more than 15% per year in the 2020s.
We see Identity Security – or identity access management, as some call it – being the fastest-growing vertical of the industry over the next several years. Consequently, we think Okta’s core business will grow by more than 20% per year in the 2020s.
Per most reviews and industry research reports, Okta is the unrivaled leader in Identity Security. If you’re looking to tap into IAM solutions, you use Okta to do it.
The company has an excellent track record of steady and high-octane topline growth.
It also has a strong reputation for sustaining robust profit margins and driving gigantic cash flow production.
OKTA stock is hovering right above an all-time-low valuation level of 10X trailing sales.
The company just reported earnings last night, and the numbers were fantastic, underscoring that Okta is capitalizing on a favorable demand environment to drive accelerated growth.
Okta was the subject of a pretty major hack recently, and it could take some time for the company to win back trust and get back to huge customer growth. And it’s a high-multiple stock that’s subject to sharp moves depending on the trajectory of Treasury yields.
Okta will clear $1.8 billion in revenues this year.
We’re looking for 30% compounded annual revenue growth over the next 10 years.
That puts revenues in 10 years at ~$25 billion.
Assuming 70% gross margins and 30% operating margins, that will likely lead to about $6 billion in net profits (after 20% taxes) or about $40 per share.
A 20X price-to-earnings multiple on $40 in EPS implies a long-term price target of $800.
As we look across the market, we’re seeing some truly incredible companies with great technologies and rock-solid business models that are trading at super-discounted valuations. Okta is one such stock. We really like it at current levels. Further downside risk seems highly limited, and upside potential is enormous. That sort of asymmetry makes Okta stock worth a deep look here.
#4 Unity Software (U)
Unity Software (U) is the world’s leading platform for creating and operating interactive, real-time 3D (RT3D) content.
The world is shifting from 2D to 3D content creation and consumption. We used to interact with digital media through 2D screens. Now, we are increasingly interacting with digital media through immersive 3D experiences.
This shift is still in its early stages. It is starting with gaming, where gamers are going from playing games on consoles to putting on headsets and playing in 3D virtual environments. But it is extending into many more industries, as well, such as construction, architecture, engineering, production, advertising, and even self-driving, where companies are using 3D content to simulate real-world experiences.
All of this 3D content needs to be created and operated by a RT3D engine. Unity operates the world’s leading end-to-end RT3D content engine.
Specifically, the company operates two business segments: Create and Operate.
Through its Create platform, Unity gives companies the best tools to develop RT3D content. The company essentially provides a suite of software tools that enable companies to create, edit, and render virtual environments.
Through its Operate platform, Unity gives companies the best tools to operate and monetize that content. The company provides a suite of mostly ad-targeting tools to help app developers and content creators monetize their platforms.
In short, Unity is creating the “picks-and-shovels” for the RT3D content megatrend.
This is a company that has historically averaged revenue growth rates north of 30% per year. Management expects to keep growing the business at this cadence for several years to come. The company’s gross margins hover around 80%.
This stock used to be a high-flier darling on Wall Street. But it has come crashing down over the past few months amid the tech sector meltdown, and took a particularly large beating yesterday, after the company reported disappointing earnings.
The current market cap is $8.9 billion.
We believe RT3D content is going to become ubiquitous. In short, all 2D digital content you see today will be replaced by 3D digital content over the next decade. The company that provided the tools for 2D content creation – as the world shifted from analog content to 2D digital content – was Adobe. Unity will be next generation of Adobe – the company that provides the tools for 3D content creation as the world shifts from 2D to 3D digital content.
Adobe stock has been an enormously successful investment over the past 10 to 15 years. In fact, it has been one of the best investments on Wall Street over that time frame. We think Unity stock could be one of the best investments on Wall Street over the next 10 to 15 years.
The company has huge competitive moats around its Create and Operate businesses which we view as highly defensible over the next several years. Specifically, we are attracted by the company’s first-mover advantage in the RT3D industry, which enables the company significant data and product advantages over new entrants.
Management strongly believes this will be a 30% annual compounder on the topline over the next five to 10 years. We agree.
The business model is highly scalable with very high gross margins and very low capital intensity, meaning that at scale, Unity should generate huge profits with huge cash flows.
The balance sheet is loaded with cash.
Yesterday’s earnings misfire is the result of a near-term, self-inflicted wound on the Operate business that management fully expects – and we entirely agree – will phase out by the third quarter of this year and be a non-factor in 2023+.
The stock is now trading at its lowest valuation ever.
Growth is slowing dramatically, mostly due to the aforementioned near-term snag in the Operate business. Management expects growth to re-accelerate very rapidly. However, if the economy does spill into a recession, growth re-acceleration back to 30%-plus levels may prove difficult.
Unity is unprofitable, and money-losers in this environment are unloved (though Unity does project to be profitable next year).
The stock is still trading at ~6X 22e sales, which isn’t super cheap.
But we think it is entirely possible that, given the secular tailwinds in RT3D content creation, Unity grows at 30% per year over the next 10 years.
Revenues this year are expected at $1.4 billion. Assuming a 30% 10-year CAGR, revenues in 10 years will be almost $20 billion.
Unity’s business model is similar to Adobe’s business model. Adobe runs at 40%+ operating margins. That seems like a doable long-term target for Unity.
Assuming so – and further assuming a 20% tax rate – then net profits in 10 years could round out to $6.5 billion.
A 20X price-to-earnings multiple on that implies a long-term valuation target of $130 billion.
The current dot-com style crash on Wall Street is entirely warranted. There were certain hypergrowth stocks out there that became overhyped during the pandemic, and which deserve to be crushed right now. However, Wall Street is not differentiating between those stocks and the high-quality hypergrowth stocks that actually deserve their premium valuations. Everything is falling, in equal magnitudes, irrespective of quality. This indiscriminatory selling is creating a huge opportunity. Investors are throwing the baby out with the bath water. Don’t chase after the bath water. Its useless. But do chase after the baby. History says that buying the right, high-quality tech stocks during market meltdowns is a genius investment strategy. Unity stock at $30 is like Amazon stock at $5 in 2001, or Apple stock at 20 cents. This is nearly that good of an opportunity.
#5 Coupang (CPNG)
Coupang (CPNG) is South Korea’s leading e-commerce company that many have called the “Amazon of South Korea.” Much like Amazon, Coupang didn’t just build an e-commerce platform. The company built an entire end-to-end e-commerce ecosystem that does everything to optimize the customer experience.
It started out by building its own in-house logistics network from the ground up – because management saw very early on that the existing infrastructure in South Korea was too slow and inefficient to truly optimize the customer experience. And of course, building this logistics network was a tremendous undertaking that required a lot of capital, resources, and time. However, that network is now complete, and Coupang is reaping the rewards of having 25 million square feet of operational infrastructure across 30 cities – a footprint large enough to put a fulfillment center within seven miles of 70% of the South Korean population.
These rewards include the company’s bread-and-butter Rocket program, which offers next-day delivery on virtually all goods and same-day/dawn delivery for most. And thanks to its logistics network, Coupang has successfully and rapidly scaled an online grocery delivery business called Rocket Fresh that’s now the largest online grocery business in South Korea.
Beyond logistics and speed, the company prides itself on low prices and eco-friendliness – two value props that score high points among South Korean consumers.
Since early 2018, Coupang has grown its revenues by about 4X. Over the next five years, analysts expect the company to grow revenues by a ~20% annualized pace. Gross margins are around 20%, and operating margins are still negative.
Coupang went public through an initial public offering in March 2021. The IPO price was $35. And on the first day of trading, the stock shot up above $60. Since then, the stock has come crashing down. And today shares trade for less than $10 a pop.
The current market cap is $16 billion.
South Korea has dream demographics and characteristics for an e-commerce giant. You have a young population with a high mobile penetration rate, a culturally embedded fondness for digital technologies, and high GDP per capita. Those qualities strongly imply that South Korea’s total commerce and e-commerce markets will sustain very healthy growth for the foreseeable future.
South Korea’s total spend in the retail, grocery, consumer food service, and travel verticals was $470 billion in 2019, so this is a very big addressable market.
Coupang currently owns about 20% of the South Korean e-commerce market, with very little formidable competition.
The logistics network constitutes an enormous competitive moat and huge barrier to entry that is large enough to claim Coupang as an unstoppable force in the South Korean e-commerce market.
Coupang has a huge opportunity to pull a page out of Amazon’s playbook and jump into streaming, advertising, and even cloud computing.
The valuation on the stock is attractive at just 0.7X 2022 estimated sales.
Gross margins are weak, just above 20%, implying that without expansion into higher-margin advertising or cloud computing verticals, Coupang will forever run on a razor-thin edge.
The global e-commerce market is clearly running out of momentum, as pandemic pull-forward dynamics are weighing on growth rates tremendously in 2022. This will likely remain a headwind for all e-commerce stocks throughout the year.
The company is a money-loser, and money-losers are public enemy No. 1 on Wall Street right now.
Now, we predict that total retail spending in South Korea will measure $750 billion by 2030.
We also predict that about half of those sales will happen online, for total online spending in South Korea to reach $375 billion by 2030.
Assuming 25% market share, Coupang could be looking at ~100 billion in revenues by 2030.
Further assuming 5% operating margins and a 20% tax rate, net profits could clock in around $4 billion by 2030.
On a 25X price-to-earnings multiple, that implies a long-term potential valuation target for Coupang of $100 billion.
The best thing to do during market crashes is to go bargain hunting for high-quality assets on fire sale. Coupang fits that bill. That’s not to say the stock is going to surge overnight from here. Like the market, it may keep struggling for a few months. But over the next 12 months to five-plus years, it could roar – and the potential upside in Coupang stock is too big from current levels to ignore.
#6 Palantir (PLTR)
Palantir (PLTR) is a revolutionary data science firm that’s pioneering a next-gen approach to analytics, which it hopes will be standardized across the industry.
It was founded in 2003 to develop advanced software for the U.S. intelligence community, aimed at assisting in counterterrorism investigations and operations. And of course, the technology the company has built to do that is world-class.
Since 2003, Palantir has grown this government-focused data science platform by leaps and bounds. Today, Palantir’s platform is considered the “gold standard” in government data analytics and has been used to power emergency non-combatant evacuation operations from Afghanistan, complete the U.S. vaccines program from clinical trials to jabs in arms, help identify a $200 billion Russian money laundering operation, and run the Public Safety Power Shutoff program to mitigate wildfire risks.
Palantir is now further commercializing that technology by expanding into corporate America. And such developments have been wildly successful. Last quarter, commercial revenues rose 47% year-over-year, paced by 132% growth in U.S. commercial revenues.
The company plans to continue its rapid scale in government and commercial businesses via new customers, new product launches, and higher usage fees. Behind that growth engine, Palantir’s management team expects the company to grow revenues by more than 30% per year over the next few years.
Palantir went public via a direct listing in late 2020. That listing reference price was $7.25. The stock opened at $10 and shot as high as $40, but it’s since come crashing back down to $10 and change.
At current levels, Palantir is worth about $21 billion.
Data science is the future, and the opportunities related to government and commercial data science are enormous. Palantir pegs its total addressable market at north of $100 billion. The company will do just $2 billion in revenue in 2022. Therefore, the growth runway here is long and compelling.
Our research suggests that Palantir has the best tech in the data science game. Its platform is by far and away the most capable. And we firmly believe that in the long run, the best tech always wins out. Therefore, Palantir is likely to become the biggest player in a $100-plus billion market.
The management team is stellar. In short, a group of intelligent Stanford-connected folks have teamed up with legendary VC Peter Thiel to lead this business, and they’ve attracted top exec talent from across Big Tech.
The engineering team is as good as it gets. You have a bunch of top engineering grads and former Amazon, Microsoft (MSFT), and Google folks building and improving the tech every day.
The business model is highly scalable with nearly 80%-plus gross margins and is already massively EBITDA profitable (margins of 35% last quarter) even with ~50% revenue growth.
The stock has been crushed and offers a compelling entry point at current levels.
Palantir stock is still richly valued at ~10X forward sales, which makes it one of the more expensive SaaS stocks at the moment.
Some believe Palantir’s platform is prohibitively expensive for most prospective enterprise customers.
The data analytics industry is very crowded, and many of the competitors are well-funded, with excellent teams and visions.
Palantir is expected to do about $2 billion in revenues this year.
Management expects revenues to grow by more than 30% per year over the next few years. We think revenues will grow at a 30%-plus compounded annual growth rate over the next 10 years.
Assuming so, 2032 revenues will likely measure around $30 billion.
This is an 80%-plus gross margin business that reminds us of an early-stage Microsoft. Microsoft operates at 40%-plus operating margins today. That seems doable for Palantir. Assuming a 20% tax rate, that would imply about $10 billion in net profit potential for Palantir.
A 20X price-to-earnings multiple on that implies a long-term valuation target of $200 billion.
Data is the new oil. It’s the king of the global economy. Recent political developments have only emphasized the importance of securing and using good data in operations. As such, we expect this already-hot industry to heat up even more over the next 12, 24, and 36 months. During that stretch, we believe Palantir will increasingly cement itself as the de facto data science leader. If the company does that, the stock will soar.
It’s that simple.
#7 Clear Secure (YOU)
Clear Secure (YOU) is a travel technology company that is leveraging biometrics to accelerate the airport security process.
In short, Clear Secure has developed a program — called Clear PLUS — that allows you to bypass the long check-in security lines at airports. It’s like a fancy, tech-enabled version of TSA Precheck.
The process is pretty simple. You sign-up for Clear PLUS. You complete some biometric information, like an iris scan or a fingerprint. Then, once you arrive at the airport, you can skip the line and head straight into the Clear Secure line. An attendant takes you to a biometric screening area, where either your iris is scanned or your fingerprint is taken. They successful ID you. And you walk straight into the physical body security line.
It’s a fancy, tech-enabled way for consumers to bypass ID security at airports. The program costs about $179 per year, so its not cheap. But folks who sign up for it, tend to love it, as the program has an NPS of 75.
Clear Secure is currently available in most major U.S. airports. The company also has a small presence in event security that it hopes to grow over the next several years. Clear Secure also just acquired a queueing technology company that should help it bolster its end-to-end operations.
The company is set to grow revenues by about 55% this year to just shy of $400 million. Gross margins are healthy. Net profit margins are negative, but cash flows are positive.
The company is worth about $3 billion.
Clear Secure is using technology to solve a big problem — long wait-lines. We believe this will be the theme of tech investing over the next few years. Find companies that are using tech to solve real-world problems. Clear Secure fits that bill.
Biometrics are the future, and Clear Secure is leaning into biometric technology to fuel its business model.
Competition is basically a moot point, since there’s only so much in airports for security lines and most airports are already at max capacity with Clear Secure and TSA Precheck. Therefore, Clear Secure’s airport business has limited competition.
Marketing costs are low since Clear Secure acquires a lot of its customers through both word-of-mouth and first-hand observation (fliers see Clear Secure at airports and wonder what it is).
The company only operates in the United States, so is shielded from global travel headwinds and only exposed to promising domestic travel tailwinds.
We also believe that airport labor shortages coupled with huge travel demand could cause some long lines at airports in summer 2022, and those long lines could increase demand for Clear Secure.
The company just reported great Q1 numbers, and delivered awesome commentary about the trajectory of the business in summer 2022. Most major airline operators have corroborated that bullish U.S. travel outlook.
The stock is pretty attractively valued at about 7.5X forward revenues for 50%+ revenue growth, a lot of long-term potential, and a great cash flow profile.
The chart looks pretty compelling, as it looks like Clear Secure stock may be ready for a big breakout.
We do not see anything terribly innovative, unique, or defensible about Clear Secure’s core biometric technology. It’s just iris scanning and fingerprint printing. That seems highly replicable.
The actual process of scanning an eyeball or taking someone’s finger print and matching it in a database with software algorithms will never be significantly faster than a person manually checking your ID. Therefore, Clear Secure’s big “speed” advantage only exists because of low volume. If Clear Secure were to ever get that big, it would become a victim of is own success because it wouldn’t be delivering on its core speed value prop.
Let’s look at Clear Secure’s long-term revenue estimates.
Analysts are calling for 50%+ revenue growth this year, followed by ~25% per year into 2025, ~20% per year into 2027, and ~15% per year into 2030. That growth track seems doable to us.
Aggressively, then, Clear Secure’s revenues could hit almost $2 billion by 2030.
Assuming 30% operating margins and a 20% tax rate, the company could produce about $500 million in net profits.
A 35X price-to-earnings multiple on $500 million in potential profits implies a potential long-term valuation target of $17.5 billion.
We like new picks. We don’t like repeat picks. But we’re doing a repeat pick today because the bull thesis on YOU seems very timely and relevant at the current moment. We think this stock is bracing for a huge near-term summer breakout. Long-term, the odds of success are much lower — but if Clear Secure can pull off morphing into the biometric security leader of tomorrow, then the stock will make long-term investors huge sums of money.
#8 Rivian (RIVN)
Rivian (RIVN) is an EV startup that is designing, manufacturing, and selling high-end electric SUVs and pick-up trucks. The company is widely considered one of the most technologically advanced and promising pure EV makers in the world today.
Rivian just began delivering units of its first model — the R1T — in 2021. It’s an electric pick-up truck that seats five, has a 54×50-inch bed, and gets roughly 300 miles per charge. It can tow up to 11,000 pounds and go from zero to 60 mph in as fast as three seconds. The interior is comprised of vegan leather, with a panoramic all-glass roof and a custom enhanced audio system.
Indeed, it’s a very high-quality electric pick-up truck. The R1T currently starts at $67,500, and Rivian delivered almost 1,000 of these trucks in 2021.
The company’s second model is an electric SUV dubbed the R1S. It’s a large-format SUV that can comfortably seat up to seven passengers and their gear. It, too, gets roughly 300 miles of driving range on a single charge and can accelerate from zero to 60 mph within three seconds. It has all-wheel drive capability and is outfitted with the same interior fittings as the R1T: vegan leather interior, all-glass panoramic roof, and a custom enhanced sound system.
R1S deliveries have yet to begin but are slated to start in 2022. Its starting price is $72,500.
Rivian went public in a highly anticipated and briefly super-successful IPO last year. The stock has since struggled after a brief hot run on Wall Street. Today the company is worth $35 billion.
The EV industry will grow by hundreds of percent globally over the next decade.
Rivian is a startup in this space that will grow without cannibalizing sales.
The company’s technology is widely revered as exceptional, and its engineering team is fully loaded with top-tier talent.
The R1T is probably the highest-performing electric pick-up truck in market today and should remain so for the foreseeable future.
When it debuts, the R1S will be either the first or second highest-performing e-SUV in the market, with the only competition being the Tesla (TSLA) Model X. The difference, of course, is that the Model X is a five-seater in its base version, while the Rivian seats seven. Sure, the Model X can be modified to have seven seats, but that pushes the costs up.
Demand is very strong. Rivian has over 80,000 net preorders in the U.S. and Canada for the R1S and R1T.
Rivian also has a unique and promising partnership with Amazon wherein the latter will buy at least 100,000 electric delivery vehicles from Rivian.
Rivian has a jaw-dropping $18.4 billion in cash on its balance sheet. That’s good enough to account for half of the market cap and should allow the company to absorb losses for several years and never have to worry about a liquidity crisis. The same cannot be said for many of Rivian’s competitors.
Rivian is still very early in the game of making EVs. Execution risks here are enormous.
Competitive risks are also big. Lucid (LCID) and Tesla are very formidable competitors in the EV startup sphere, while Ford (F),GM (GM), and others are very formidable competitors in the traditional auto sphere. Anywhere Rivian turns, it will be greeted by lots of competition.
The valuation is still very rich at $18 billion ex-cash for just 2,500 vehicles produced since inception.
Assuming the global auto market continues to grow at the same annual pace it has for decades, then our models suggest around 75 million new passenger cars will be sold globally in 2030.
We believe about half of those will be electric.
We further believe Rivian has a chance to capture 10% of the global EV market, implying 3.75 million deliveries for Rivian in 2030.
Assuming average sales prices of $70,000, that puts 2030 revenues at over $260 billion.
Further assuming a Tesla-like margin profile with 20% operating margins, it would produce $50 billion in operating profits.
After taxes, you’re talking about $40 billion in net profit.
A 20X multiple on that implies a long-term valuation target of $800 billion.
Rivian is one of the most exciting startups in the world today. The company has developed amazing technology in a hypergrowth industry and has validated that tech through 2,500 deliveries of some of the greatest EVs on the road today. Even further, Rivian has the talent and resources to build on its great start and eventually turn into a company like Tesla. If that happens, this stock could fly higher. And currently, the stock doesn’t price in much of the upside potential. As such, it could be worth taking a position in Rivian stock today, while its down before its big growth ramp.
#9 Datadog (DDOG)
Datadog (DDOG) is a leading observability software provider that we see as a “unicorn” in this market. It’s the rare combination of being both a very promising firm in the early stages of long-term compounded growth and a high-quality tech enterprise with already-big profit margins and sizable revenues.
The story here is simple.
Every company is fully embracing their digital transformations. That means they are all adopting digital tools and services to modernize their business. That’s great — but it’s also a lot to manage. And to optimize the utility of those services, businesses need to make sure they’re healthy.
Insert observability software. It allows companies to make the most out of their digital transformations by providing tools and analytics to help observe and monitor the health of enterprise software stacks.
Observability tools are relatively niche today, but companies who use them see a significant boost in productivity. We believe that as companies fully embrace their multi-faceted digital transformations and adopt multiple enterprise software tools, observability software will become an enterprise ubiquity.
The growth potential in this industry is enormous — and Datadog is the unrivaled leader in this space, with market-leading software and a ton of customers who are increasing their spend on the platform every year because it works so well.
The company is currently valued at $45 billion.
Observability is a very underrated and undervalued component of the enterprise digital transformation stack that we ultimately view as the unifying software that makes it all work. We believe observability software spend will witness significant growth over the next 10 years.
Per our research, Datadog is the “top dog” in this space. Gartner reviews on the product are extraordinarily strong, and every data scientist we’ve consulted with spoke very favorably of the platform. Not to mention, the company has great revenue retention rates, which speak to the reality that current customers are rapidly growing their spend.
In 2022 specifically, we think Datadog stock will benefit from an exceptionally favorable IT spending backdrop and a shift in focus toward building out observability capabilities as businesses adopt more digital transformation tools.
The company is also cash-rich, high-margin, and profitable — attractive traits in this defensive market.
Datadog’s only problem is its valuation.
The stock is trading at 30X forward sales and nearly 300X forward earnings. Those are very rich multiples. And in this market, high-multiple stocks have witnessed the most intense selling pressure.
Long-term, we see Datadog as a 30% compounded revenue grower, which would put revenues at over $20 billion within 10 years.
Datadog also has huge room for margin expansion. This is an 80% gross margin business, with only 10% operating margins due to low scale. As the business scales up, we see operating margins running toward 40%.
That implies over $8 billion in operating profit potential at-scale, which we presume would be roughly equivalent to about $8 billion in EBITDA (given the low capex nature of the business).
At scale, this stock will look like Salesforce (CRM). Salesforce stock currently trades at 50X EBITDA. A 50X multiple on $8 billion in EBITDA would imply a $400 billion long-term valuation target for Datadog.
The stock market will remain very volatile over the next few weeks, but volatility creates opportunity in the stock market. And currently, we’re starting to see a lot of great opportunities emerge. We think now is the time to begin getting more aggressive as prices continue to fall. And at the top of our “buy the dip” shopping list is Datadog — a massive long-term winner to get at a discount. We think you should consider adding it to your list, too.
#10 Gitlab (GTLB)
GitLab (GTLB) is a software company that has developed a next-generation platform that unifies the entire DevOps process.
The platform is called — perhaps unsurprisingly — The DevOps Platform. It is a single application that brings together development, operations, IT, security, and business teams to deliver needed DevOps outcomes.
This platform is unique from legacy DevOps techniques, which are usually siloed by team. GitLab believes such siloes result in wasted resources that are dedicated to communication and record-keeping. To resolve this, the company has put the entire DevOps process into one platform for use by all teams, from business executives planning a software application, to developers creating the application, to security teams defending it.
GitLab’s “bread-and-butter” is its Create solution. This allows developers to collaborate on the same code base without accidently conflicting with or overwriting each other’s changes. And it simultaneously maintains a running history of software contributions from each developer to allow for version control.
GitLab usually lands a Create contract with the development team at an organization and then leverages success therein to cross-sell other teams to the entire DevOps Platform. This is its “land-and-expand” model.
The company currently has 4,057 customers with more than $5,000 of annually recurring revenue, and about 430 customers with $100,000 of annually recurring revenue. Those customer counts are growing at a ~70% year-over-year pace. Revenues this year will clock in around $245 million, up more than 60% year-over-year.
It is currently valued at $8.8 billion.
The DevOps market has enormous growth potential. Various market research firms peg the market as growing by ~20% to ~30% per year throughout the 2020s.
GitLab is one of three premiere players in the DevOps market, alongside BitBucket (owned by Altassian (TEAM)) and GitHub (owned by Microsoft (MSFT)).
Since its two main competitors are owned by bigger tech companies, GitLab projects to remain the only pure-play on DevOps for the foreseeable future.
This is a very high gross-margin business that runs on annually recurring software revenues. Gross margins regularly clock in around 90%.
GitLab is also a very low-expense business because its workforce is 100% remote. The company doesn’t even have an office. To that end, operating expenses are relatively small for a software company. And capital expenditures are basically zero — creating a situation where, at scale, GitLab could be enormously profitable with huge cash flows.
The engineering team at GitLab is very impressive, and the company’s Glassdoor ratings are superb — meaning that the company is keeping its smart people very happy.
The stock has been crushed and now trades below its IPO price.
Valuation is a problem. GitLab is trading around 30X forward sales. That’s very rich.
The DevOps growth opportunity is compelling, but the addressable market isn’t enormous. At best, we see DevOps spending growing to ~$100 billion per year.
Operating losses are widening, not narrowing as you would want to see in a hypergrowth, money-losing company like this.
Revenue growth rates are decelerating.
Competition is fierce. Both BitBucket and GitHub are backed by very big companies with very capable management teams.
As stated earlier, we see the DevOps market growing to $100 billion by the end of the decade.
We believe GitLab can nab about 10% of the market.
We believe, at scale, this will be a 90% gross margin company with a relatively muted opex rate around 40%.
That implies operating margins of 50%, which would turn $10 billion in revenue into $5 billion in operating profits.
After taxes, that should translate into $4 billion in net profits.
A 25X multiple on that implies a long-term valuation target of $100 billion.
We love the DevOps market as an investment opportunity for the 2020s. In that market, you have three big players. Only one of them, GitLab, is a standalone public company. Therefore, if you’re looking to play the DevOps market in the 2020s, GitLab is your only option.
Senior Investment Analyst