Growth stocks that thrived during the peak period of the coronavirus pandemic have entered a bear market as a result of changes in consumer habits and a tighter monetary policy by the U.S. central bank.
Tighter Financial Conditions Hurting Growth Stocks
The MSCI World Growth Index, which tracks the performance of large and mid-cap equities such as Tesla, Amazon, Alphabet, and others, declined more than 20% from its November peak, marking its biggest drop since the economic crisis and leaving it in the bear market.
The index had seen a particularly bad performance in April, with the tech-oriented Nasdaq Composite declining 4% in a single day.
Inflation in the U.S. hit a record high of 8.5% in recent months and the Federal Reserve is expected to react by hiking interest rates by over 2.25 percentage points by the end of 2022, raising concerns among some investors that the thriving period of the Growth index which has seen it rally over 250% might have come to an end.
In other words, traders are now worried that the days of making significant gains from purchasing speculative stocks with strong growth potential are now over.
Barry Norris, CIO of Argonaut Capital, said that traders are now realizing that investing is much more than just “handing out capital like lollipops at a school fete [festival] to anyone with an idea for flying taxis or carbon-free hot dogs.”
Norris, who has been anticipating a bear market for the majority of assets, noted that there has been a central bank put each time a significant sell-off happened in the markets, referring to stimulus packages that have been introduced to protect against market breakdowns. The central bank is not going to lend a hand to investors this time, he said.
One of the biggest losers in the market this year has been Cathie Wood’s Ark Innovation fund, an Exchange Traded Fund (ETF) that backs growth stocks like Block, Spotify and Coinbase. The fund has declined 48% from the start of the year through April 28, recording one of its worst-ever months.
Furthermore, tech-focused Scottish Mortgage Trust has declined 28%, along with multiple hedge funds spawned from Tiger Management, which have also seen significant losses in recent months. Goldman Sachs’s non-profitable technology index is down 39% year-to-date, after reaching a high in early 2021.
In light of this news, here are 5 growth stocks to consider for long-term investors.
based data platform offering a range of solutions such as data warehouses, query optimization, and parallelization solutions.
The stock has received a boost recently after Wolfe Research analyst Alex Zukin said, “Snowflake could become one of the biggest players in the cloud computing industry and compete with the likes of Microsoft, Alphabet, and Amazon.”
Snowflake went public in September 2020 at $120 a share. The company initially became available for trading at $245, before skyrocketing to $400 last fall. However, the stock has been on a decline since then and closed at $173.80 on Friday.
Zukin raised the stock’s rating to Outperform, with a target price of $250. The company’s financial report for the fiscal fourth quarter emphasizes the valuation debate on Snowflake’s stock. The company has seen its revenue grow 101% in the period, topping the consensus estimates and recording the fastest growth of all cloud stocks.
Zukin said Snowflake’s decision to replace legacy data warehouse systems and shift to the cloud has been the biggest driver of the company’s growth lately, adding he sees unique opportunities for the company ahead.
Zukin believes the cloud is an appropriate solution for data warehousing as it can provide unlimited on-demand resources, demands lower up-front investments and offers a natural integration point.
CrowdStrike Holdings Inc. (NASDAQ: CRWD) better known as CrowdStrike, is a cybersecurity technology company that develops cloud workload and endpoint security, threat intelligence, and cyberattack response solutions.
The investment banking company Jefferies
Group recently voiced its optimism about CrowdStrike’s prospects, citing increased demand. Analyst Joseph Gallo rated the stock at Buy, with a price target of $275.
Gallo said he views CrowdStrike as a “category winner”, citing high enterprise renewal rates, exceptional gross margin, and a market that could sustain hyper-growth for multiple years.
The cybersecurity sector has been gathering momentum lately as an increased number of companies continue to operate in a hybrid environment, while security budgets are expected to keep increasing as a percentage of spending on information technology.
Gallo believes that CrowdStrike is the biggest beneficiary in an environment with an increased number of cyberattacks, while a shortage of security personnel mitigates risks of potential revenue deceleration for the company.
CRWD stock is up 8.6% year-to-date as it continues to benefit from analyst optimism. Goldman Sachs analyst Brian Essex recently upgraded the stock’s rating from Hold to Buy and hiked the price target from $270 to $285, saying the company could take advantage of a heightened corporate focus on security following Russia’s invasion of Ukraine.
Datadog Inc. (NASDAQ:DDOG) develops a cloud-based monitoring and analytics platform that automates infrastructure monitoring and application performance monitoring, bringing together data from servers, containers, databases, and third-party services.
The company has seen outstanding growth rates in recent years, with its revenue jumping 84%
to $326.2 million in the fiscal fourth quarter, rising at a full-year rate of 70%. Furthermore, the company remains profitable and has reported GAAP earnings per share (EPS) of 2 cents in the period, compared to a 5 cent loss per share in the year-ago quarter.
Raymond James analyst Adam Tindle rated Datadog’s stock at Outperform after the exceptional Q4 financial report which should ease concerns over the observability market. While its price per share is not cheap, the majority of Wall Street analysts are considerably bullish on Datadog’s stock despite the premium.
Earlier this year, Datadog acquired Timber Technologies, a company that develops a vendor-agnostic, advanced observability data pipeline known as Vector. Customers that use vectors are able to collect, enhance, and transform logs and other observability data, which they can then transfer to their desired destination.
MongoDB (NASDAQ:MDB) develops an open-sources database platform for automating, monitoring, and deployment backups. In addition, the platform can also render business software integration and platform certification.
The company offers a unique opportunity ahead for investors, with the database market expected to grow from $74 billion in 2021 to $121 billion
in 2025. What’s even more important is that the majority of that growth is expected to come from new applications that are well suited for MongoDB’s platform.
MongoDB currently captures just 1% of the database market, providing the company with an outstanding opportunity in the future as the legacy database industry turns to more sophisticated and modern database solutions.
MongoDB’s annual growth has risen from 40% in fiscal 2021 to 48% this past year, while its topline has more than doubled over the past two years. The company’s cloud-based solutions continue to attract new customers and now represent key drivers of the company’s revenue.
Furthermore, a number of MongoDB’s customers are large companies that use the platform to power essential enterprise applications, with more than 1,300 of the company’s customers spending a minimum of $100,000 each year.
provides sales and marketing, data management, account management, prospecting, and custom solutions to clients worldwide.
Many analysts continue to view ZoomInfo as an attractive opportunity in the market. This is because companies with increasing growth that are profitable and free cash flow positive are among the best growth investments during a period of high inflation and a hawkish monetary policy by the central bank – and ZoomInfo fits that description.
Furthermore, 99% of ZoomInfo’s revenue comes from its subscription services and these companies are highly favored by investors during a period when riskier investments should be avoided. Again, this is because companies that derive most of their revenue from subscriptions are very predictable and their stable cash flows allow them to safely reinvest in growth.
In addition, ZoomInfo is still in the early phases of building out new products and solutions, with its offerings being adopted and favored faster than the company expected.
ZoomInfo recently announced it has acquired a leading recruitment marketing and employer branding platform Comparably. The combination of Comparably and ZoomInfo’s TalentOS is expected to create one of the most sophisticated and powerful talent solutions in the industry.
Growth stocks have been subject to intense selling pressure lately given the tighter financial conditions and risk-off environment. However, some of these stocks now trade at very attractive terms, especially for investors with a long-term horizon that are willing to suffer in the near term.
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