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2 Explosive Growth Stocks to Buy Now and Hold

Growth stock investing has proven to be a profitable strategy since the Great Recession of 2007-09. But in a time when the market is regularly setting new highs, some growth stocks are losing momentum. Worries about rising inflation, supply chain difficulties, and labor shortages seem to be weighing down many of these stocks.

However, short-term volatility should not be a major concern for long-term investors, especially those picking stocks driven by solid secular tailwinds.

One such tailwind is the digital transformation of the global economy, especially as the ongoing pandemic begins to wane. According to MarketsandMarkets, the global digital transformation market size is expected to more than double from $469.8 billion in 2020 to over $1 trillion in 2025.

Image source: Getty Images.

Companies like UiPath (NYSE: PATH) and The Trade Desk (NASDAQ: TTD) are well-positioned to benefit from this increasing adoption of digital solutions. Here's why these two stocks can be attractive buy-and-hold picks for retail investors.

1. UiPath: Pioneering robotic process automation

Leading robotic process automation (RPA) player UiPath is making it easier for organizations to automate a range of repetitive tasks, including data entry, email management, invoicing, and inventory management. The company leverages computer vision, machine learning, artificial intelligence, and other technologies to develop software bots for performing routine manual tasks. This helps reduce human errors as well as overall labor costs (fewer human resources are required to do the same job). UiPath estimates its total addressable market opportunity to be over $60 billion.

Gartner has rated UiPath as the best RPA vendor based on execution capability in 2020 and estimates its market share to be 29%. This dominant player seems well poised to benefit from the ongoing labor shortages and wage inflation in North America.

At the end of the second quarter of fiscal 2022 (ending July 31, 2021), UiPath's annual recurring revenue (ARR) jumped by 60% year over year to $726.5 million. This metric, considered one of the most important for subscription-based software companies, will further expand in coming quarters on the back of the company's strategy to shift from long-term contracts involving significant discounts to annual contracts with lower discounts. These shorter contracts, however, may affect revenue visibility.

UiPath is not yet GAAP profitable and is also not free cash flow positive. However, the company had a strong balance sheet with $1.9 billion in cash reserves and negligible debt at the end of the second quarter. The company has reported a steady improvement in gross margins from 71.5% in 2019 to 89.2% in fiscal 2021. UiPath has also created an extensive ecosystem comprised of over 4,700 technology and business partners.

UiPath's share prices are down by over 22% so far this year. However, against the backdrop of a solid business proposition, improving fundamentals, and robust partner ecosystem, this pullback can prove to be an attractive entry point for patient investors.

2. The Trade Desk: Focusing on data-driven advertising

Leading independent demand-side advertising technology company The Trade Desk's share prices jumped by over 30% after a stellar third-quarter earnings (ending Sept. 30, 2021) report. The company reported a 39% year-over-year jump in revenue to $301 million, which is admirable considering the effect of political spending in the previous-year quarter. The company's net income was up 44.2% year over year to $59.4 million. The Trade Desk continues to capture market share and boasts a solid 95% customer retention rate.

Unlike many of its ad tech competitors, The Trade Desk has proven quite successful in maneuvering the changing privacy landscape after Apple introduced an iOS 14 update requiring explicit user consent for app publishers to use its cookie-like identifier for advertisers (IDFA). This is mainly attributed to the rapid adoption of the company's recently launched Unified ID Solution 2.0 alternative to cookies, by both publishers and ad buyers.

Cord-cutting and the subsequent shift of advertisers from linear TV to connected TV (CTV), as well as increasing adoption of video, mobile, and social media advertising, are proving to be key tailwinds for programmatic advertising. The Trade Desk expects CTV to emerge as a major growth driver since most customers cannot afford the cost of no advertisement streaming.

Emarketer estimates U.S. CTV ad spending will grow from $14.44 billion in 2021 to $29.5 billion in 2024. The agency also expects CTV ad spending to account for 7.4% of total media spending in 2024, up from 4.7% in 2021. CTV advertising uses personalized logins for ad targeting and is not dependent on third-party cookies. The Trade Desk's services currently reach out to over 87 million households and over 120 million CTV devices in the U.S.

The Trade Desk is striving to rapidly capture a significant share of the programmatic advertising market by focusing on data-driven advertising. The company's recently launched Solimar platform enables ad buyers to base their campaigns on first-party data (data collected directly from customers).

The Trade Desk has partnered with Walmart (NYSE: WMT) and has developed a new demand-side platform called Walmart DSP. This collaboration has given the company access to Walmart's first-party omnichannel data, which will be leveraged to expand into offline retail ad buying. The company's international business is also growing faster than its North American business and accounted for 12% of its total revenue in the third quarter.

Trading at 115.3 times forward earnings, The Trade Desk's stock is not cheap. Competitors such as Magnite (NASDAQ: MGNI) and PubMatic (NASDAQ: PUBM) are trading at forward price-to-earnings (P/E) multiples of 36.6 and 58.6, respectively. However, based on its leadership position and adaptability to the changing privacy landscape in the ad tech world, The Trade Desk can be an attractive buy even at these elevated levels.

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Manali Bhade has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Magnite, Inc, PubMatic, Inc., The Trade Desk, and UiPath Inc. The Motley Fool recommends Gartner and 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.


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