After falling sharply last year, the S&P 500 and the Nasdaq Composite rebounded 7% and 13.6%, respectively, through the first few weeks of 2023. That momentum can be chalked up to cooling inflation and more modest interest rate hikes from the Federal Reserve, both of which buoyed investor sentiment.
Yet the market is still packed with compelling buying opportunities. For instance, shares of Cloudflare (NET) and Airbnb (ABNB) are still trading down 73% and 45%, respectively, from all-time highs, but both businesses continue to grow at a rapid rate despite economic uncertainty.
Here’s why investors should buy these two growth stocks in February.
1. Cloudflare: Becoming a cloud computing giant
Cloudflare provides a growing range of application, network, and security services that accelerate and protect business-critical software and infrastructure. It also provides computing and storage solutions through its developer platform, which allows businesses to build performant applications, webpages, and streaming experiences.
Cloudflare distinguished itself as the fastest cloud computing network and developer platform on the market, and that advantage gave the company a strong foothold in several cloud verticals. Most notably, industry analysts recognized Cloudflare as a leader in content delivery network software, web application firewalls, and edge development tools, and the company is gaining traction with its zero-trust security suite.
Despite battling economic headwinds, Cloudflare delivered an exceptional third-quarter earnings report. Its customer count climbed 18% to 156,000, and the average customer spent 24% more over the past year. In turn, revenue increased 47% to $254 million, and the company reported non-GAAP net income of $0.06 per diluted share, up from $0.00 per diluted share in the prior year.
Turning to the future, Cloudflare is positioned to maintain or even accelerate its momentum. The company has captured less than 1% of its $125 billion addressable market, but more than 20% of the internet already relies on at least one Cloudflare service. That creates a tremendous opportunity to upsell existing customers, and the company consistently demonstrates its ability to do that.
On that note, management says revenue will grow fivefold in the next five years, and that figure pertains to organic revenue growth, meaning it excludes new products and acquisitions. However, investors who follow Cloudflare know the company has brought new products to market at an incredible pace in recent years, meaning it will likely exceed its medium-term financial target.
With that in mind, shares currently trade at 23 times sales, a discount compared to the three-year average of 41.8 times sales. That creates a reasonable buying opportunity for patient investors.
2. Airbnb: Revolutionizing the travel industry
Airbnb operates a travel marketplace that connects guests with rental properties listed by more than 4 million hosts around the world. That asset-light approach comes with two advantages over traditional hospitality companies.
First, Airbnb can onboard new hosts and expand its inventory in minutes, without spending millions of dollars. Second, Airbnb can offer guests a wider range of accommodations, both in terms of type and location. Listings on its platform range from cottages to castles, located anywhere from rural towns to big cities.
Airbnb delivered a strong financial performance in the third quarter. Revenue rose 29% to $2.9 billion, and free cash flow (FCF) soared 81% to $960 million. But the company is innovating at a rapid clip, and growth could easily accelerate under more favorable economic conditions.
In 2021, Airbnb added flexible search options to its platform, helping guests plan trips when they are flexible on the date and destination of travel. The company also introduced AirCover, which provides free damage protection and liability insurance for all hosts.
In 2022, Airbnb added dozens of search categories to help guests discover specific property types, such as beachfront rentals, designer homes, and treehouses. The company also enhanced its support services for new hosts. Those new features make Airbnb a more compelling option for guests and hosts, which should add momentum to the network effects that power its marketplace.
The company values its addressable market at $3.4 trillion, but Airbnb reported gross bookings of $61 billion over the past year, meaning it has captured less than 2% of its market opportunity. Additionally, shares currently trade at 9.7 times sales, a sizable discount to the three-year average of 17.9 times sales. That’s why this stock is a buy in February.
— Trevor Jennewine
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Source: The Motley Fool