2021 and 2022 (even for now) have been bad for many growth investors. The tech- and growth of the company-heavy Nasdaq Composite Index dropped 0.5% over the past year, and dropped 10.5% since the start of the new year. In times like these, however, it’s important to remember that even a year or two of poor investment performance is still very short-term in the grand scheme of things.
The recent growth of stock underperformance does not mean that the companies themselves are on a terribly straight. Conversely, while share prices can be extremely volatile each month, growing companies will reward patient investors. PayPal Holdings (NASDAQ: PYPL), Service Today (NYSE: NOW)at Dynatrace (NYSE: DT) looks like three such stocks to give some chance now.
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1. PayPal: Building new relationships with digital payments
The digital payments giant PayPal has been a fascinating growth story since it broke away from eBay in 2015. Revenue and free cash flow have both increased more than 200% since then. However, PayPal has fallen through difficult times lately. It is getting financial results that include stimulus spending and an e-commerce boom earlier in the pandemic, and its merchants are dealing with supply chain problems, inflation, and other pandemic disruptions.
But central to recent investor concerns is eBay’s still impact on PayPal’s finances. EBay is switching to its own in-house payments system and cutting PayPal out of the loop. As a result, PayPal says its revenue in 2021 will reach $ 1.4 billion thanks to eBay, and its full-year growth rate would be 24% instead of the reported 17% if not for the e-commerce separation. on the site. This will remain a headwind in 2022. PayPal said it expects revenue growth of 15% to 17%, or 19% to 21% excluding effects from eBay.
This contributed to PayPal’s stock price falling by more than 60% from its highest reached last summer. But PayPal as a business is still in good shape. Its peer-to-peer money-sharing app Venmo will begin integrating into a more powerful e-commerce platform later this year, a small company called Amazon. And in the opinion of PayPal management, the company is on track to add at least 15 million net new active accounts by 2022 (it ended in 2021 with 426 million active accounts). Despite the somewhat disappointing outlook, it is still a long -term growth story.
After the penalty it received, PayPal’s stock is now trading for a reasonable 25 times following the 12-month free cash flow. I am re -buying the technology -leading of these financial services after management released its poorly received outlook in 2022.
2. ServiceNow: A highly profitable enterprise software staple
Inflation is a rising concern this year for growth stocks, mainly because it is prompting the Federal Reserve to start raising interest rates-likely to begin in March. Even if a growing business no longer has to borrow money, increasing rates is still a concern because they lower the current value of a growth stock. Some market analysts urge investors to sell shares of businesses that are currently unprofitable, as they are particularly sensitive to interest rate changes.
However, in the midst of the sale, some high-quality names were severely punished. I believe ServiceNow is one of those companies. A leader in automation software for businesses, ServiceNow is a staple for organizations looking to develop apps and processes that save their workforce time and enhance customer experiences. Given the inflationary environment we live in, as well as the general shortage of labor for hire, ServiceNow has a clear path to continued growth (sales have increased by 290% over the past five years).
It’s more of a high-growth cloud computing software investment, too. ServiceNow is actually quite profitable. The company generated $ 1.87 billion in free cash flow last year, good for a 32% free cash flow profit margin. As ServiceNow continues to expand, there is room for its profit margin to expand further. For example, in the fourth quarter of 2021, free cash flow actually represents an incredible profit margin of 46%!
True, the growth is baked into the current stock price. Even after it fell 14% from its all-time high, the trade shares 66 times chasing 12-month free cash flow. But with management predicting another 26% increase in subscription revenue in 2022 and great revenue generation, it’s a fantastic time to give this longtime cloud leader another look.
3. Dynatrace: High-growth cloud infrastructure monitoring at a reasonable price
Dynatrace is another rock-solid cloud computing company, and it’s also profitable. A pioneer of cloud infrastructure observability software, Dynatrace is fast becoming a must have for large organizations with extensive IT and cloud assets. Its software suite provides real-time insights into operations, finding problem spots, and automates fixes and updates to keep mission-critical functions working at the tip-top shape.
As expected from a software-as-a-service outfit, Dynatrace is generating steady sales growth at approximately 30% pace. It adds a lot of new customers, and current users also increase their use of the platform. Annual recurring revenue grew 29%, or 32% when foreign currency exchange rates are not included, in the last quarter (Dynatrace fiscal 2022 Q3). And even as the company increased spending on expansion initiatives, free cash flow was still positive at $ 59.2 million last quarter, or 25% of revenue.
As solid a growth story as this is, the share price is ultimately unstable. Dynatrace stock is now down 43% from its all -time high. Perhaps it was a bit overpriced a few months ago, but it’s a fantastic bet on the growth of the cloud industry. Dynatrace’s new CEO is Rick McConnell, a veteran executive from the internet infrastructure giant Akamai, is a good start to the job. Current year’s expectations for revenue were recently upgraded to indicate 31% year-over-year revenue growth, up from 30% growth previously.
Dynatrace is now trading 53 times following 12 months free cash flow and 13 times expected sales value of the business. The last few months have been difficult for this stock, but the company itself is still growing at a fast and steady pace. A little patience should pay off significantly for Dynatrace shareholders as the company rides on cloud infrastructure development.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool counseling service. Let’s be motley! Asking an investing thesis-at least one of us-helps all of us think critically about investing and make decisions that will help us become smarter, happier, and richer.