While growth stocks have not been all the rage in 2022 as they were in 2021, I think investors should look at them before the calendar flips to 2023. There are a couple of reasons why growth stocks could boom next year. First, Federal Reserve Chairman Jerome Powell recently suggested that the Fed might begin to ease the pace of its interest rate hikes in December. That’s massive news for growth investors, as that shift could lead to an increased appetite for riskier growth assets.
Second, after two consecutive quarters of GDP contraction, the economy grew by 2.9% in the third quarter of 2022. That could be a sign the economy will avoid a slide into an official recession and instead shift into a higher gear despite higher interest rates. Both of those conditions would bode well for growth stocks, and I’ve got two names that I think are primed to deliver great returns.
Alphabet
Advertising is a cyclical business, as most companies slash their advertising budgets during challenging times. However, if the pace of interest rate hikes slows and the economy gets off to the races again, then a company with a vast amount of advertising real estate like Alphabet (GOOG) (GOOGL) could thrive.
Nearly 80% of Alphabet’s Q3 revenue came from advertising, but this share might increase if ad spending ramps up broadly. Furthermore, the tech company’s advertising revenue only grew by 2.5% in Q3. Even a limited increase in advertising spending could provide Alphabet the spark it needs to return to growth mode.
If this turns out to be a false narrative, Alphabet still has a booming cloud computing business that grew 38% in Q3 and now provides 10% of Alphabet’s total revenue. Even though it’s a relatively small segment, at that pace of expansion, cloud computing will still make a noticeable impact on Alphabet’s overall revenue growth.
Another factor that supports the idea of investing in Alphabet now is its relatively cheap valuation of 19 times earnings. Many analysts might say that’s still expensive. However, the company’s valuation by that metric is at its lowest point in six years.
If the economy doesn’t recover in 2023, I’m still excited about Alphabet’s long-term prospects. Moreover, with the stock trading at a historically low valuation and a rapidly growing cloud computing business, Alphabet is a top buy.
Procore
Construction isn’t a very tech-intensive industry — in fact, it’s the second-least-digitized sector after agriculture and hunting. Procore (PCOR) is aiming to change that.
Its construction management software gives contractors and project owners a single project base to pass updates along, change specifications, check in on the budget, or see the project’s progress. Procore points out that the problems its software solves could cost the companies undertaking construction projects billions of dollars without it. In 2018, construction rework expenses caused specifically by poor data and miscommunications were more than $250 billion, Procore asserted in its 2022 Investor Day presentation.
The adoption of Procore’s software is in the early stages, which gives it a huge growth runway.
Procore thinks the market opportunity for the construction volume that could flow through its platform is $3.6 trillion in the U.S. and $5.9 trillion internationally, for a combined total of $9.5 trillion. Keep in mind that Procore doesn’t think that is its revenue opportunity, just the value of the projects that could be managed on its platform.
Procore is rapidly expanding. Its revenue increased by 41% year over year to $186 million in the third quarter. However, because the business is still in its early stages and focused on trying to add customers and grow its top line, Procore isn’t profitable. Its operating loss margin was 38% — or 18% if you strip out stock-based compensation.
That’s a sizable profitability gap Procore must close, but if it could capture even a quarter of the global market, it would become a massive company. The stock is also reasonably priced at 9.2 times sales — about the level where many mature software companies trade.
With growth stocks potentially coming back in style, Procore could be set for a nice run.
— Keithen Drury
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Source: The Motley Fool