Some high-quality growth stocks are too cheap to ignore following this year’s bear market. Valuations are at the cheapest level in years, creating opportunities for great long-term returns. These two growth stocks have enormous potential as leaders in exciting industries, and investors should consider adding them to their portfolio.
Splunk (NASDAQ: SPLK) is a leader in the digital security analytics industry. Sitting at the intersection of data analytics and cybersecurity, Splunk helps organizations monitor their software operations more efficiently and effectively.
Splunk stock took a beating over the past year, as investors fled from growth stocks with aggressive valuations. Its price-to-sales ratio dropped from around 15 to its current level around 4. That makes it more attractively valued than Alphabet, Apple, and Microsoft.
SPLK PS Ratio data by YCharts.
Of course, Splunk is far less established than those tech giants, which makes it somewhat less stable. However, stability is often a trade-off with growth potential. Smaller companies usually haven’t reached addressable market saturation. They can still drive major revenue increases by layering in new features to upsell existing customers. That’s exactly the case with Splunk — it’s trading at a discount to some of the high-profile tech stocks, but it has superior growth prospects.
Despite slowing down slightly in recent quarters, Splunk still reported 32% sales growth in its most recent earnings release. Its cloud services segment, which has become the largest contributor to overall revenue, expanded roughly 60% in the second fiscal quarter. Splunk’s fastest-growing business unit is becoming the largest, which bodes well for sustained growth.
Image source: Getty Images.
Even better, this isn’t a fledgling, cash-burning business. Splunk boasts over 700 customers with contracts of at least $1 million annually. It’s forecasting net profits for the full year, and its producing hundreds of millions in free cash flow. Splunk’s profit margins are relatively narrow as it invests for ongoing growth, but it’s somewhat rare to find a profitable company that’s expanding faster than 30% — especially in the current macroeconomic environment.
The company also sports a stellar 129% net dollar retention rate, meaning that it keeps its customers and expands those relationships. That’s evidence of a strong product suite, a quality account management strategy, and satisfied customers. These are all important indicators of an economic moat, which is a necessary part of long-term success.
Investors can buy Splunk shares at a forward price-to-earnings ratio of 37.6, which will seem awfully cheap if the business continues along this path for the next decade.
2. Shockwave Medical
Shockwave Medical (NASDAQ: SWAV) is a high-profile growth stock in the medical device industry. The company’s proprietary system, which it calls Intravascular Lithotripsy (IVL), uses sonic pressure waves to treat atherosclerotic cardiovascular disease. Lithotripsy is a common treatment for kidney stones, but Shockwave repurposed the technology to clear plaque from the vascular system.
Calcified cardiovascular disease is a big problem, and it appears to be getting worse. About half of Americans over the age of 45 have atherosclerosis, and heart disease is the leading cause of death in the U.S. and much of the world. Most of the treatments for acute cases involve invasive surgery, which is risky, expensive, and requires extensive recovery. Shockwave’s IVL is minimally invasive, and it generally doesn’t damage small tissues around arteries, as is common for angioplasty. IVL received Food and Drug Administration clearance in February 2021, so the technology is still in early stages of commercial roll-out.
That’s exciting from a clinical standpoint, and it’s translating into strong financial results for Shockwave. The company forecasts 105% revenue growth for the full year, attributed to the launch of a new product in the U.S. It’s clear that there’s plenty more room to run — the company’s annual revenue run rate is around $500 million, and the company estimates that its addressable market is $8.5 billion. Even if sales growth slows to Wall Street’s 30% estimate for next year, it’s still early along Shockwave’s growth trajectory.
Despite having excellent prospects and positive cash flow, Shockwave Medical stock is close to its cheapest levels since its 2019 IPO. Its price-to-sales ratio is just above 21, having soared above 75 following the FDA clearance. The stock is up 30% year to date, so the falling valuation ratio is a case of fundamentals catching up to the price.
SWAV PS Ratio data by YCharts.
Shockwave stock isn’t exactly cheap with a forward P/E ratio close to 70, but the current price would look like a huge discount if the company continues to expand for the next few years. Expansion into new geographies and treatment indications could pave the way to serious cash flows. There’s amazing potential for a novel solution to such a major health issue.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Ryan Downie has positions in Alphabet (A shares) and Microsoft. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Apple, Microsoft, ShockWave Medical, and Splunk. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.