A bull market is coming: 2 perfect growth stocks to buy now and hold forever
The past year has been miserable for many investors. Economic uncertainty has pushed the S&P500 in a bear market, and many growth stocks lost more than half their value. For instance, Airbnb (ABNB 7.00%) and Z-scale (ZS 6.81%) saw their stock prices plunge 56% and 67%, respectively, leaving both stocks near a 52-week low.
Of course, no one knows when the recession will end, but more than half of economists polled by The Wall Street Journal expect the Federal Reserve to start cutting interest rates by the first quarter of 2024. At that time, economic uncertainty could dissipate and the stock market could rebound.
However, even if that doesn’t happen, investors can still find comfort in this fact: every past bear market has eventually ended in a new bull market. This means that the next bull market is almost certainly on the way. With that in mind, Airbnb and Zscaler are trading at premium prices relative to their historical valuations, creating a perfect buying opportunity for patient investors.
1. Airbnb: a travel agency that does not own rental properties
Airbnb reinvented the travel industry. Rather than buying real estate, the company has built a platform that aggregates rental properties from over 4 million hosts. This asset-light business model makes Airbnb more efficient and adaptable than traditional hotel operators. It can expand its inventory (i.e., onboard new hosts) faster without spending millions of dollars, and it can target its marketing efforts to quickly build supply where travel demand is highest .
Airbnb also offers a differentiated experience for guests. Listings range from suburban properties and urban apartments to beachfront bungalows and tropical treehouses. It can even be a source of inspiration. Airbnb recently added dozens of search categories (eg, beach, cabin, farmhouse) that help guests discover the perfect stay, sometimes in places they never thought to look.
Thanks to these advantages, Airbnb is growing rapidly both up and down. Third-quarter revenue climbed 29% to $2.9 billion and free cash flow jumped 81% to $960 million. Additionally, the gross value of bookings – a leading indicator of revenue growth – soared 31% to $15.6 billion in the quarter. This means that people are still planning to travel despite the economic uncertainty.
That said, patient investors have good reason to be optimistic about Airbnb, even if growth slows in the near term. Travel and tourism is one of the largest industries in the world, and Airbnb values its addressable market at $3.4 trillion – a figure that includes $1.8 billion for short stays, 1.4 trillion dollars for experiences and 210 billion dollars for extended stays.
Currently, the shares are trading at 8.5 times sales, a bargain compared to the average valuation of 19.2 times sales since Airbnb’s IPO in 2020. This price is more than reasonable, considering Airbnb’s past financial results and opportunities for growth. That’s why this growth stock is worth buying today.
2. Zscaler: AI-powered network security and cloud protection
Cloud computing has rendered traditional network security architectures ineffective. Data and applications are often stored in the cloud today, so it no longer makes sense to route traffic through firewalled corporate data centers. Zscaler solves this problem with its Secure Access Service Edge (SASE), a platform that uses machine learning to inspect web traffic and enforce zero-trust security policies in the cloud.
Zscaler operates the largest network security cloud in the world. Every day, more than 300 trillion security signals inform its machine learning models, and each one makes its threat detection engine more efficient. Management believes this advantage allows its SASE platform to offer better protection than any competing product.
In a nutshell, Zscaler creates a faster, more secure computing environment for its customers while eliminating the need for expensive on-premises security appliances. This value proposition has led to strong demand. Zscaler has reported a net retention rate of over 125% over the past seven quarters, meaning the average customer is spending over 25% more each year. In turn, revenue soared 61% to $318 million in the latest quarter, and free cash flow more than doubled to $75 million.
Going forward, investors have good reason to be optimistic. Management sees an opportunity to grow core product revenue sixfold with current customers — and that’s not including new offerings like cloud protection and digital experience monitoring. In total, the company values its addressable market at $72 billion, and the company is well positioned to capitalize on this opportunity.
Research company Gartner has recognized Zscaler as an industry leader for 11 consecutive years. Even better, Gartner believes SASE adoption will quadruple between 2021 and 2025. This trend should be a powerful growth driver for Zscaler, and with stocks trading at 15.5 times sales – a considerable discount from the three-year average of 37.2 times sales – this cybersecurity stock is worth buying today.
Trevor Jennewin holds positions at Airbnb, Inc. and Zscaler. The Motley Fool holds positions and recommends Airbnb, Inc. and Zscaler. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.