3 Growth Stocks That Could Go Parabolic

Many growth stocks were crushed over the past year as rising interest rates drove investors toward more conservative investments. But as Warren Buffett once famously said, investors should get “greedy when others are fearful.”

Therefore, investors who can stomach the near-term volatility should be seeking out promising growth stocks to buy instead of fleeing to the near-term safety of CDs or T-bills. I believe three growth stocks — The Trade Desk (TTD), DigitalOcean (DOCN), and Uber (UBER) — could eventually go parabolic when the market finally recovers.

1. The Trade Desk
The Trade Desk is the world’s largest independent demand-side platform (DSP) for digital ads. DSPs enable advertisers to bid on ad space across a wide range of desktop, mobile, and connected TV (CTV) platforms with automated tools.

The Trade Desk is a popular option for advertisers that want to reach beyond the walled gardens of Alphabet‘s Google and Meta‘s Facebook with ads for the “open internet”.

Most of its recent growth has been driven by CTV ads for streaming video platforms. It expects that market to continue to expand over the long term as those platforms pivot from ad-free subscriptions toward cheaper (or free) ad-supported plans.

Between 2017 and 2022, The Trade Desk’s revenue increased at a compound annual growth rate (CAGR) of 39% as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew at a CAGR of 48%.

For 2023, analysts expect its revenue and adjusted EBITDA to grow 20% and 7%, respectively, even as the broader advertising sector faces near-term macro headwinds. Its stock might not seem cheap right now at 15 times this year’s revenue, but it could still have plenty of room to run as the CTV market expands and advertisers broaden their reach across the open internet to reduce their dependence on Alphabet and Meta.

2. DigitalOcean
DigitalOcean provides cloud-based infrastructure services to small businesses. But unlike larger cloud platform providers like Amazon Web Services (AWS) or Microsoft Azure — which both mainly serve larger companies — DigitalOcean carves out tiny “droplets” of individual servers to provide its clients with the storage and computing power they actually need.

DigitalOcean’s revenue grew 25% in 2020, 35% in 2021, and 34% to $576 million in 2022. It anticipates another 21%-25% growth in 2023, even as the persistent macro headwinds force companies to rein in their spending on cloud-based services. It also expects its annual revenue to exceed $1 billion by 2025, which implies it can grow its top line at a CAGR of at least 20% over the next three years.

Its accelerating growth in customers, rising retention rates, and expanding adjusted EBITDA margins (which rose from 30% in 2020 to 34% in 2022) all support that rosy outlook. It expects its adjusted EBITDA margin to rise to 38%-30% in 2023.

DigitalOcean could face some challenges as its expands, but its stock still looks cheap at five times this year’s sales. I believe it could soar a lot higher once the macro situation improves and the bulls stampede toward promising cloud stocks again.

3. Uber
Last but not least, Uber is still growing like a weed — but its stock still trades 16% below its IPO price and looks surprisingly cheap at two times this year’s sales. The transportation and delivery services provider’s growth stalled out during the pandemic as more people stayed at home, but its gross bookings rose 56% in 2021 and grew another 28% in 2022. Its adjusted EBITDA also improved from negative $774 million in 2021 to positive $1.71 billion in 2022.

Uber’s growth was supported by its consistent growth in monthly active platform consumers (MAPCs), which hit 130 million in the first quarter of 2023, as well as its rising take rates across its mobility and delivery businesses.

Uber also resolved its post-pandemic driver shortages long before its domestic rival Lyft, and it shrewdly focused on optimizing its spending as it gradually rolled back its incentives for its customers and drivers. A recent court decision in California should also prevent Uber from being forced to reclassify its domestic drivers as full-time employees.

For 2023, analysts expect Uber’s revenue to rise 18% as its adjusted EBITDA more than doubles. However, the market still seems to be conflating Uber with Lyft, which has been growing at a much slower rate than its larger rival. When investors realize Uber is actually a much better-run company, its stock could finally soar far above its IPO price.

— Leo Sun

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Source: The Motley Fool