Inflation, rising interest rates, and other macroeconomic headwinds broadly crushed growth stocks in 2022. Some of that sell-off was justified, since many growth stocks had reached unsustainable valuations following the buying frenzy over the previous two years. But many babies were also tossed out with the bathwater.
I believe four growth stocks -- Datadog (DDOG 2.67%), Impinj (PI 1.12%), Unity Software (U -10.22%), and The Trade Desk (TTD -1.59%) -- fit that description and will likely rally much higher in 2023 and beyond.
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1. Datadog
Datadog's platform aggregates diagnostic data from an organization's servers, databases, and apps on unified dashboards for IT professionals. That approach makes it much easier to diagnose potential problems, and breaks down the silos between different types of computing platforms.
Datadog established an early-mover's advantage in this niche market, and its total number of large customers (those that generate more than $100,000 in annual recurring revenue) rose from 858 at the end of 2019 to about 2,600 in the third quarter of 2022. Revenue rose 66% in 2020 and increased 70% in 2021, and it anticipates 60% to 61% growth in 2022.
Datadog's adjusted gross margin is hovering near 80%, and it's already profitable on a non-GAAP (generally accepted accounting principles) basis. It isn't profitable on a GAAP basis yet, and its stock isn't cheap at 11 times next year's sales. But the long-term potential of its niche market could easily justify that higher valuation.
2. Impinj
Impinj is a leading producer of radio frequency identification (RFID) tags, scanners, and software. RFID tags are often used to track a company's products, but they can also power smart kiosks, public transportation systems, and even smart factories.
Impinj benefited from the "retail apocalypse" over the past decade as retailers scrambled to use RFID tags to analyze their inventories and sales trends. The ongoing supply chain disruptions over the past year also highlighted the importance of RFID tags in efficiently tracking products across the world.
Impinj's revenue declined 9% in 2020 as the pandemic disrupted brick-and-mortar retailers, but rose 37% in 2021 as those headwinds waned. It expects its revenue to grow 33% to 34% in 2022 as the demand for its chips continues to outstrip its available supply, and it sees that imbalance continuing into 2023.
Impinj is profitable on a non-GAAP basis, and its GAAP net losses are gradually narrowing. At 9 times next year's sales, this oft-overlooked stock appears reasonably valued relative to the growth potential of the Internet of Things (IoT) market.
3. Unity Software
Unity's game-development engine is used to create more than half of the world's mobile, console, and PC games. It bundles together tools for creating graphics, sound effects, and monetization features for smaller developers and larger studios.
Revenue rose 43% in 2020 and grew another 44% in 2021. The pandemic generated strong tailwinds for the gaming industry, which prompted more developers to use Unity to create new games.
But over the past year, Apple's (AAPL -0.69%) privacy update on iOS disrupted Unity's integrated ads. So the latter acquired the ad tech company ironSource to reset its advertising business and offset that slowdown. But it expects that business to remain under pressure as macro headwinds rattle the digital advertising market.
Nonetheless, Unity still expects its revenue to rise 23% to 25% in 2022 as its non-GAAP profitability improves in 2023. The next few quarters will be incredibly bumpy, but this growth stock is on sale at 5 times next year's sales.
4. The Trade Desk
The Trade Desk operates the world's largest independent demand-side platform (DSP) for digital ads. DSPs enable advertisers to purchase ad space across desktop, mobile, and connected-TV (CTV) platforms.
It generates most of its growth from the CTV market, which has grown rapidly in recent years as streaming video services disrupted linear TV platforms like cable and satellite TV. It's also benefiting from the shift from pricier ad-free streaming subscriptions toward cheaper ad-supported tiers.
The Trade Desk's revenue rose 26% in 2020, even as the pandemic curbed ad spending across multiple industries. Revenue rose 43% in 2021 as those headwinds waned, and it expects at least 34% growth in 2022.
It's profitable by both GAAP and non-GAAP measures. Its stock isn't a bargain yet at 12 times next year's sales, but it remains one of the best plays on the secular growth of the CTV market and programmatic digital ads.
