Right now, 10-year Treasury yields are surging to record highs, moving from 4% at the end of August to 4.4% as of this writing. As a result, growth stocks have been under tremendous pressure. For instance, the ARK Innovation ETF (NYSEARCA:ARKK) is down -11%, and that’s just one example highlighting the deterioration in high-growth names.
The market finally recognizes that the Federal Reserve will stay higher for longer. After all, crude oil prices are rising, and worker demands for higher wages are increasing. Getting back inflation to the 2% target will be a tall order.
Against this backdrop of rising interest rates, most growth stocks will be pressured. Indeed, an increase in the discount rate only means lower valuations for stocks. Besides, now investors have alternatives with short-term Treasury bills yielding over 5%. Only high-quality growth stocks with solid profitability will do well in this environment.
And yet, some remain strong. Here are a few growth stocks that can outperform the rest. They are dominant forces in their markets. And they are still growing revenues by over 20% and have the potential to sustain that rate. In addition, they are profitable, with positive free cash flow margins.
The Trade Desk (TTD)
The logo for The Trade Desk is displayed on a smart phone.
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The Trade Desk (NASDAQ:TTD) is benefiting from the increasing adoption of connected televisions. It’s a top-three demand side platform alongside Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google and Amazon (NASDAQ:AMZN). Its software assists advertisers in optimizing their ad spend through programmatic transactions.
Its significant scale enables it to handle billions of ad impressions. According to management, it observes over 10 million queries per second. Notably, the company is well positioned to gain share since it has access to all CTV inventory in the U.S.
The firm continues to deliver outstanding results, reporting accelerating revenue growth in the second quarter of fiscal 2023. Driven by budget shifts to connected TV, revenues increased 23.2% year-over-year.
What’s more, the company reported significant improvements in profitability, with EBITDA margins increasing 190 basis points. Non-GAAP adjusted EBITDA was $180 million, with adjusted EBITDA margins hitting an impressive 39%.
Over the long term, advertising budgets will continue to shift to CTV. Research has shown that ad spenders choose the medium due to its audience targeting capabilities. Also, the decline of legacy media means that streaming companies will increase their CTV advertising efforts to target audiences who don’t watch legacy media.
Another driver for top-line growth is the momentum in retail media. And in the medium term, the 2024 election cycle has just begun, which will be a substantial tailwind.
ServiceNow (NOW)
ServiceNow office building in Silicon Valley;
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One of the growth stocks that could shrug off higher interest rates is ServiceNow (NYSE:NOW), a play on workflow automation. CEO Bill McDermott is very optimistic about the company’s prospects going forward. He expects that IT spending growth will accelerate in 2024 and double the 2023 rate.
The company’s IT service management (ITSM) solutions have become a must-have service for enterprises. Organizations are moving to the Now Platform to accelerate digital transformation and automate workflows. The company now has over 1 trillion workflows running through the platform.
Fundamentals for the company have been stellar. It has achieved over 20% long-term growth while maintaining free cash flow margins above 30%. For instance, in Q2 2023, revenues grew 23% YOY. In addition, management guidance for the full year calls for revenue growth in the range of 24.5% to 25% and for free cash flow margins of 30%.
Looking ahead, management sees a massive opportunity in generative artificial intelligence (AI). By interconnecting workflows with intelligence from data, ServiceNow will help companies achieve significant productivity gains. Already, the company has infused generative AI into its workflow offerings. For instance, the Now Assist for Virtual Agent is helping users get the information they need.
The software-as-a-service provider intends to integrate AI capabilities across its IT service management, customer service management and human resource solutions. With its integrated suite of automation solutions, including robotic process automation, process mining and AI, ServiceNow will lead the AI revolution.
MercadoLibre (MELI)
MercadoLibre (MELI) homepage on a smartphone
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The Amazon of Latin America is going from strength to strength. Aided by the secular shift to e-commerce and weakened competitors, MercadoLibre (NASDAQ:MELI) is thriving in the Latin American market.
The retail giant has the lion’s share of the online retail market in Brazil, Argentina and Mexico. Furthermore, its payment platform is gaining traction and will process over $172 billion in transactions in 2023.
And the company has other growth levers on its wings. It has built up an extensive logistics network. As a result, it has increased take rates from merchants by offering fulfillment services. Furthermore, expanding advertising in its marketplace is an area where there could be increased expansion.
The company has been growing revenues at a double-digit rate, and there are no signs of a slowdown. According to Seeking Alpha, revenues have increased at a 55% compounded annual growth rate (CAGR) over the last five years.
MercadoLibre trounces online retailers like Amazon and Sea Limited (NYSE:SE) in terms of growth. Yet it’s cheaper on a price-to-earnings basis. That’s why many analysts are bullish on the stock. TipRanks’ analysts have given the stock an average price target of $1600, representing a 25% upside.
On Aug. 7, JPMorgan Chase reiterated its “overweight” rating on MELI stock. Additionally, they raised the price target from $1,700 to $2,000. Due to the strength in second-quarter earnings, the firm also boosted earnings estimates. According to them, it’s one of their top growth stocks in the e-commerce sector.
MELI stock is cheap trading at 35x forward price-to-earnings compared to Amazon’s 47x.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Charles Munyi has extensive writing experience in various industries, including personal finance, insurance, technology, wealth management and stock investing. He has written for a wide variety of financial websites including Benzinga, The Balance and Investopedia.
