The S&P 500 and Nasdaq Composite fell into a bear market more than a year ago, and both indexes still trade well below their highs. But history says a rebound is coming. Neither index has ever failed to recover from past drawdowns. That doesn’t mean the market will soar any time soon, though — in fact, some analysts are forecasting a recession in 2023, and that could lead equities lower in the near term.
But no one knows the future, and many growth stocks brimming with long-term potential currently trade at reasonable prices. Shopify (SHOP) and Arista Networks (ANET) fit that bill. Rather than attempting to time the market, investors should take advantage of the buying opportunities on these two top growth stocks while they last.
1. Shopify: Simplifying commerce for businesses of all sizes
Shopify struggled last year as high inflation suppressed consumer spending. Revenue climbed just 21% to $5.6 billion, and non-GAAP earnings fell 94% to $0.04 per diluted share. Unfortunately, the current quarter looks worse. Management says revenue growth will decelerate into the high teens, implying a sequential decline, even as operating expenses continue to climb. That grim forecast, coupled with weak financial results for several consecutive quarters, has the stock trading down 72% from previous highs.
On the bright side, that creates an opportunity for patient investors, because the long-term investing thesis for this stock is still intact. Shopify is the leader in e-commerce software, and it accounted for 10% of U.S. e-commerce sales last year, second only to Amazon. That means the company is well positioned to benefit as more shopping takes place online, and no recession could possibly reverse that trend.
Global retail e-commerce sales are projected to increase at 13.6% annually through 2030, but Shopify should grow much more quickly. Its software helps businesses manage sales across physical and digital stores, including direct-to-consumer websites. No marketplace operator offers that flexibility. But Shopify aims to further differentiate itself with the Shopify Fulfillment Network (SFN) and Shopify Plus.
The ongoing buildout of the SFN will be a headwind to profitability in the near term, but that logistics infrastructure will ultimately simplify three phases of the supply chain for merchants: receiving freight from suppliers, distributing inventory to warehouses, and fulfilling customer orders. It will also let merchants offer two-day delivery to U.S. buyers across multiple sales channels. No other commerce company offers that convenience. To that end, the SFN should make Shopify a more compelling option for businesses of all sizes.
Additionally, Shopify is pushing upmarket with Shopify Plus, its high-end commerce software designed for larger businesses. Plus merchants get more customization options and exclusive tools, like ShopifyQL Notebooks for data analytics, Shopify Audiences for machine-learning powered marketing, and B2B on Shopify for wholesale commerce. The Plus platform is clearly resonating with the market. Plus merchants accounted for 33% of monthly recurring revenue in the fourth quarter, up from 29% in the prior year.
Currently, shares trade at 10.8 times sales, a bargain compared to the three-year average of 33.4 times sales. At that price, investors will likely regret not buying this growth stock when the next bull market rolls around.
2. Arista Networks: The technology that powers the cloud
Arista provides high-speed networking systems that power cloud and enterprise data centers. Its switching and routing platforms offer industry-leading performance and capacity, meaning they can move large amounts of data very quickly. Arista also provides adjacent software for network workflow automation, telemetry, and security.
Arista says its core innovation is the Extensible Operating System (EOS). Every Arista switch and router runs the same version of EOS, allowing clients to deploy a seamless network fabric that spans from public clouds to private data centers, across wired and wireless environments. Legacy vendors, by comparison, often implement multiple versions of different operating systems, which makes network management more complicated for IT teams.
Arista eliminates that complexity and, in doing so, lowers the total cost of network ownership for clients. That compelling value proposition is further strengthened by its reputation for high-quality customer support. Arista works closely with clients to build custom solutions, and that has earned the company a world-class net promoter score of 80, meaning customers are very likely to recommend its products.
Arista delivered solid financial results last year. Revenue increased 49% to $4.4 billion and GAAP earnings soared 62% to $4.27 per diluted share. As a caveat, growth could decelerate in the near term as businesses slow IT spending to account for economic uncertainty. But Arista dominates the market for high-speed data center switches — it holds more than twice as much market share as second-place Cisco Systems — meaning it should benefit as technologies like cloud computing and artificial intelligence create a need for faster data center networks in the future. Accounting for those trends, management says its total addressable market will grow at 13% annually to reach $51 billion by 2027.
Currently, shares trade at 12 times sales, above the three-year average of 10.4 times sales. But Arista’s networking platforms quite literally power the cloud, and the cloud is the heart of the modern IT world. That’s why investors should buy a small position in this growth stock today.
— Trevor Jennewine
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Source: The Motley Fool