Insights

2 High-Conviction Growth Stocks to Buy Now

The U.S. equity market has been very volatile in the past months. In June 2022, the U.S. consumer price index was up 9.1% year over year, the highest increase in the past 40 years, and the producer price index was up 11.3% year over year. The Federal Reserve increased benchmark interest rates by 75 basis points in July, yet the market seems to have turned slightly positive on expectations of slower rate hikes in subsequent quarters.

Despite this, the tech-heavy Nasdaq Composite is still firmly in bear market territory. Many high-quality tech stocks such as Okta (NASDAQ: OKTA) and DigitalOcean (NYSE: DOCN) are now available at historically low levels, presenting attractive entry points for retail investors.

Let’s see why these companies can prove to be solid picks now.

1. Okta

Shares of leading cloud-native identity management player Okta are currently down 56% so far this year. Besides broader market declines, a cyberattack in the first quarter of fiscal 2023 (ending April 30, 2022) has also affected overall investor sentiment. However, the extent of share price correction seems unjustified. Despite the data breach that may have affected many of Okta’s clients, the company has raised its full-year fiscal 2023 guidance  in the first quarter. This is indicative of Okta’s confidence in retaining most of its customers even in these difficult circumstances.

Okta offers identity solutions to companies to ensure that only appropriate individuals (employees and customers) have access to the right resources (data, applications, and infrastructure) at the right time. The company has built a technology and vendor-neutral identity platform called Okta Integration Network (OIN). Here, a user can access over 7,000 third-party applications with a single sign-on. Thanks to OIN, Okta has successfully created a sticky customer base. The company also benefits from significant network effects since the utility of OIN continues to increase as more and more applications join this network.

Okta is not yet profitable. However, it is making progress in the right direction. The company has been growing its revenue year over year by more than 40% for the past four years. The company also has a highly visible revenue base since subscription revenue accounts for over 95% of the total revenue. In the first quarter, Okta’s remaining performance obligations (RPO), which is a combination of deferred revenue and backlog, were up 43% year over year to $2.71 billion. At the same time, current RPO (revenue to be recognized in next 12 months) is up 57% year over year to $1.41 billion. Hence, Okta is well poised to continue its robust top-line growth trajectory in coming quarters. Okta is also cash flow positive, which is a solid positive in a recessionary environment.

Okta is trading at 8.5 times forward sales, the lowest it has been since January 2021. Considering its growth potential and low valuation, Okta can prove to be an attractive long-term investment for retail investors.

2. DigitalOcean

Cloud computing services provider DigitalOcean’s stock is down 49% so far this year. Despite being fundamentally sound, the company has suffered in the broader tech sell-off.

DigitalOcean is focused on providing cloud-native infrastructure and platform tools to developers, start-ups, and small and medium-sized businesses (companies with fewer than 500 employees), an area largely ignored by large cloud providers such as Amazon, Microsoft, and Alphabet. The company is targeting a $72 billion market opportunity, which is expected to grow to $145 billion by 2025.

DigitalOcean’s easy-to-adopt, reasonably priced, and technologically superior software and cloud-based solutions have played a key role in attracting new customers as well as increasing average revenue per user. The success of the company’s land-and-expand strategy is apparent from its net dollar retention rate of 117% in the first quarter, up from 107% a year ago. This means that paying customers as of the first quarter of 2022 spent 17% more on the company’s solutions, after including the impact of client churn. The success of its upsell strategy makes it even harder for customers to switch to competitors. DigitalOcean’s developer-friendly solutions, 24/7 customer support, and community differentiate it from the competition.

DigitalOcean’s recent financial performance has also been impressive. In the first quarter, revenue was up year over year by 36% to $127.3 million. The company is not yet profitable but became free cash flow positive in fiscal 2021.

Digital Ocean is trading at 7.4 times forward sales, which is the lowest it has been in the past year. Against the backdrop of its solid business positioning and improving financials, this can be considered an exciting investment opportunity for long-term investors.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Manali Bhade has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, DigitalOcean Holdings, Inc., Microsoft, and Okta. The Motley Fool has a disclosure policy.

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