With the year nearly over, it would be an understatement to say that 2022 wasn't a great year for growth stocks. Spurred by inflation, rising interest rates, and other macroeconomic pressures, the tech-heavy Nasdaq Composite index remains in a bear market and has fallen roughly 32% in this year's trading. Many growth-dependent companies have seen even bigger pullbacks across the stretch.
But as psychologist and behavioral finance expert Daniel Crosby writes in his book, The Laws of Wealth, "Trouble is opportunity." With investors having broadly fled from growth stocks this year, there are great companies operating in promising service categories that have seen their valuations pushed down to levels that set the stage for explosive long-term upside.
With that in mind, here's why Cloudflare (NET -1.78%) and Mitek Systems (MITK -0.09%) are two stocks that could deliver huge wins for investors.
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1. Cloudflare
Cloudflare is the leading provider of content-delivery-network (CDN) service and software-based protection from distributed-denial-of-service (DDoS) attacks. With its CDN software speeding up rates of data transmission and its DDoS defenses helping to ensure that websites and applications remain online, the company is playing a key role in the evolution of a better internet -- and it has the sales to prove it.
Cloudflare managed to grow revenue at a 51% compound annual growth rate (CAGR) from 2018 through 2021. Despite this year's more challenging economic conditions and previous growth setting up challenging bases of comparison, the business has continued to expand at a rapid clip. Revenue jumped 47% year over year in the third quarter to reach $254 million, and the company expects to end this year with revenue up 48.5% on an annual basis.
Customers that generate at least $100,000 in sales annually account for more than half of the company's overall sales, and Cloudflare is doing an impressive job of bringing new large clients on board.The company added 159 new large customers in the quarter to bring its count in the category to 1,908, up roughly 51% year over year.
But while large customers are the most important from a revenue-generating perspective, the company provides services to all manners of businesses, institutions, and start-up website and application creators. The good thing about this is that Cloudflare is positioned to grow with customers of all sizes. In total, the web services provider has more than 156,000 paying customers worldwide, and its clients tend to spend more on its services as they scale their projects.
Cloudflare is going to play an essential role in the long-term growth of the internet, and the stock stands out as a worthwhile buy after falling 65% year to date and roughly 79% from its high.
2. Mitek Systems
As commerce and communications continue to migrate and proliferate through digital channels, the importance of being able to verify identities will only increase. In order to meet regulatory requirements, reduce the risk of damaging breaches and exploits, and take advantage of the benefits created by digital-transformation trends and mobile-first user experiences, identity verification has to function at high levels.
That's where Mitek Systems comes in. Mitek provides specialized offerings in identity-verification categories, including facial biometrics, image capture technology, and ID card verification systems. The importance of having a combination of identity proofing, fraud detection, and user-authentication solutions means that enterprises already have multilayered needs. Demands in the space will likely become increasingly complex as existing operations scale and new digital technologies are integrated, and Mitek is positioned to benefit from this trend.
The company grew revenue 24% year over year to reach $39.3 million in the third quarter and has been serving up consistent profits on a non-GAAP (adjusted) basis. While adjusted net income per share fell roughly 4% year over year in the quarter, earnings across the first nine months of the fiscal year are up 25%.
Mitek sees the overall global digital identity solutions market growing at a 16.2% CAGR from 2021 through 2026, expanding from $23.3 billion to reach $49.5 billion at the end of the projection period. With the company sporting a market cap of roughly $474 million and valued at 2.8 times this year's expected sales, Mitek is a small cap that's just scratching the surface of its market opportunity. Furthermore, shares look cheap after falling 42% across this year's trading.
The company should continue to benefit from favorable demand tailwinds as the world continues to become increasingly connected, and it has room for explosive growth down the line.
