2 Growth Stocks to Buy Before the Big Bull Rally

No doubt about it, the current bear market for growth stocks has been brutal. The growth-heavy Nasdaq Composite index's level is down roughly 17% over the last year, and 29% from its peak, even with a recent recovery rally, and those numbers look small compared to the sell-offs many stocks have suffered. But the good news is that bear markets usually don't last very long, typically not much more than a year. 

While it's impossible to pinpoint when exactly it will begin, the next bull phase for growth stocks is somewhere on the horizon, and investors who build positions in top stocks that are currently down big from their highs could see stellar returns. With that in mind, read on for a look at two category-leading companies that look poised to deliver huge wins over the long term. 

1. Cloudflare

Cloudflare (NET) is a leading provider of content-delivery-network (CDN) software, domain-name-system (DNS) services, and protections against distributed denial-of-service (DDoS) attacks. Between its core CDN, DNS, and DDoS services, it's no stretch to say that the company is one of the most important and trusted providers of modern web services. 

With new businesses launching and existing companies carrying out digital-transformation initiatives, Cloudflare has been attracting new customers and ended last year with 162,000 paying clients. The company is also finding success by building relationships with customers that were already on board with its platform. Cloudflare posted a 122% net revenue retention rate in the fourth quarter, which means the existing customers increased their spending by 22% compared to the prior-year period. 

Thanks to these growth-driving catalysts, the web services specialist's revenue climbed 42% year over year to $247.2 million in Q4. The company also posted its best-ever operating and free cash flow in the period, coming in at $78.1 million and $33.7 million, respectively. 

Cloudflare's midpoint guidance calls for revenue to grow roughly 37% this year, which still looks quite solid given that the overall macroeconomic backdrop appears more challenging than a year ago. With gross margins typically in the mid-to-high 70% range and an asset-light, highly scalable business, the company is in a good position to shift into delivering consistent profitability and strong earnings growth over the long term.

With the business still on pace to grow at an encouraging clip and the company's share price down roughly 72% from its high, I think Cloudflare is positioned to deliver strong returns for investors who employ a buy-and-hold strategy with the stock at today's prices.

2. Airbnb

Airbnb (ABNB) has delivered tremendous business performance since going public in December 2020, but the company's share price currently trades down roughly 15% from market close on the day of its initial public offering. The stock is also down approximately 43% from the lifetime high that it reached in February 2021, and I think there's a very good chance that it will bounce back to reach new highs and deliver market-crushing performance for long-term investors. 

So why has the stock been struggling? In this case, it really looks to be the result of the broader macroeconomic conditions shaping the market. Airbnb's earnings results have been consistently fantastic, but investors have rotated out of growth stocks due to high levels of inflation, rising interest rates, and other pressures. I think investors can benefit by taking advantage of the disconnect between Airbnb's business and stock performances. 

The fourth quarter saw the company grow revenue 24% year over year to reach $1.9 billion, and net income skyrocketed 480% to reach $319 million and mark a new, best-ever performance for Q4. Free cash flow (FCF) also rose 21% compared to the prior year period to reach $455 million and bring the company's FCF total for the year to $3.4 billion — up 49% on an annual basis. 

ABNB PE Ratio (Forward) Chart.

With the company's market cap sitting at roughly $78 billion, Airbnb trades at roughly 35 times this year's expected earnings. It's also trading at less than 23 times last year's FCF. With the company guiding for revenue growth of roughly 18.5% year over year in the first quarter despite macro headwinds and for sales-and-marketing expenses as a percentage of revenue to be flat for the full-year period, the business is on track to serve up more strong earnings and FCF growth. 

Airbnb stands as a clear category leader in its corner of the travel and hospitality industry, and the business is in a great position to continue capitalizing on a massive long-term market opportunity. While the company's valuation has been caught up in the broader pullback for growth stocks, the rental specialist's many strengths have shares primed to soar when the market's next bull phase hits. 

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Originally published on Fool.com

Keith Noonan has positions in Airbnb and Cloudflare. The Motley Fool has positions in and recommends Airbnb and Cloudflare. The Motley Fool has a disclosure policy.