After a volatile few years in the stock market, it's difficult to identify growth stocks with clear paths higher. Macroeconomic uncertainty threatens financial results and investor confidence, but long-term investors can always focus on companies with strong operational metrics, high-quality products, and reasonable valuations. These two stocks combine all those qualities, making them compelling breakout candidates for investors.
AppLovin
AppLovin(NASDAQ: APP) provides artificial intelligence (AI) software that allows advertisers to reach customers in targeted and efficient ways. The company aims to reduce the cost for businesses to acquire customers while also reaching more qualified prospects. Consumer marketing is an ever-changing landscape, but it's undeniably valuable. Media ad spending is nearly $400 billion annually in the United States, with digital platforms taking 80% of total spending. These dollars supported major companies that connect businesses with consumers, such as Alphabet, Meta Platforms, Snap, and Microsoft. If AppLovin can deliver demonstrable returns on ad spending for its customers, its value proposition is strong and straightforward.
Image source: Getty Images.
It's hard to argue with the company's results. AppLovin delivered consistently strong revenue growth, with a 44% expansion in its most recent quarter. After swinging into profitability recently, its bottom-line performance has been even more impressive. The company's free cash flow is up more than 500% since 2021, capped off with 102% growth in its most recent quarter.
APP Revenue (TTM) data by YCharts.
Investors and analysts have taken note of these impressive operating metrics. The stock is up 230% year to date, but it still has a reasonable valuation. Its price-to-sales (P/S) ratio is above 11, which is somewhat expensive. However, the company's rapid growth rate and wide profit margin justify that valuation. Its forward price-to-earnings (P/E) ratio is 21, and its price-to-cash flow ratio is around 25. Those are both exceptionally affordable for a company with AppLovin's growth rate.
The stock will likely experience volatility if difficult macroeconomic times lie ahead, and the company's future performance will be challenged by stiff competition. Nonetheless, this stock is priced to deliver huge gains if the company maintains the level of operational excellence that it has managed in recent years.
Zscaler
Zscaler(NASDAQ: ZS) is one of the cybersecurity stocks that has fallen somewhat out of favor relative to its peers. Since the start of 2022, Zscaler stock has fallen 46%, while the First Trust NASDAQ Cybersecurity ETF is up 13%. CrowdStrike and Palo Alto Networks soared even higher over the period.
ZS Total Return Level data by YCharts.
Zscaler's lagging performance can be attributed to slowing growth combined with an unsustainably high valuation. The stock's P/S ratio was around 60 three years ago, and its forward P/E ratio was above 80 earlier this year. Those levels were difficult to sustain as growth slowed, and the stock suffered.
Long-term investors can't get too sidetracked by momentum. Zscaler couldn't deliver the results necessary to justify those aggressive valuation ratios, but it's still been impressive. The top line marches consistently higher. Even its "slow" growth rate is over 30%, which is higher than many high-profile companies' aspirations.
ZS Revenue (TTM) data by YCharts.
Continued sales growth has led the company near profitability. The company is just short of break-even on a GAAP basis, and it's notched impressive free cash flow expansion that is slightly outpacing sales growth.
Zscaler reported 115% net dollar retention in its most recent quarter. This is a clear indicator of customer satisfaction, product enhancements, and effective sales strategies. Gartner has rated Zscaler as a leader of the Secure Service Edge industry for three straight years, ranking it right alongside or ahead of its key competitors.
Growth investors may not be enamored with Zscaler's past few years, but the stock is far less speculative now. It's a reliable cash flow generator with a respected product portfolio and metrics to support that claim. Its forward P/E ratio is just under 60, which isn't expensive compared to its high-profile cybersecurity peers. That's especially true when you consider its forecast growth rate, which is one of the highest among established cybersecurity stocks. After a few difficult years, Zscaler's valuation now offers real upside potential.
Should you invest $1,000 in AppLovin right now?
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Ryan Downie has positions in Alphabet and Microsoft. The Motley Fool has positions in and recommends Alphabet, CrowdStrike, Meta Platforms, Microsoft, Palo Alto Networks, and Zscaler. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
