2 growth stocks to buy before a big rally

The stock market – especially the growth sector – is experiencing tons of volatility right now. Since the start of 2021, many high-growth software and technology stocks have begun to fall from all-time highs.

For example, the top growth fund Ark Innovation ETF (ARKK -2.31%) peaked in February 2021 and has been on a steady decline ever since, with shares down 68% over the past year. This has been typical of growth stocks over this period, with many falling by 50% or more.

It may not seem possible, but eventually stocks will start rising again. Here are two growth stocks to buy ahead of the next big rally.

1. Autodesk: Software for the Infrastructure Decade

My first choice is Autodesk (ADSK -1.37%), a leading provider of software for the architecture, engineering and construction (AEC) markets. Thanks to multiple acquisitions and the continued wind of digitization within the AEC industry, Autodesk has been able to grow its revenue steadily over several decades. This should continue with Autodesk’s leading design products, such as AutoCAD and Revit, generating steady revenue growth.

But the company also offers new and innovative products that should help accelerate growth. For example, in manufacturing and mechanical engineering, Fusion 360 is winning many customers for Autodesk with its flexible cloud-based platform. Released just a few years ago, Fusion 360 already has 205,000 paying subscribers and grew revenue by 107% annually from its fiscal year 2019 to 2022. The product represents only a small portion of the Autodesk’s total business today, but how fast it grows revenue, Fuson 360 could become a significant revenue stream within three to five years.

Second, Autodesk is moving down into construction with software products for people working on construction sites. It’s called Autodesk Construction Cloud. It was launched a few years ago, but is already growing like a weed. Last quarter, monthly active users (MAUs) of its core Autodesk Build app grew 45% quarter over quarter, which should roughly translate to revenue growth. The construction market is one of the least digitized sectors of the economy, providing a multi-billion dollar opportunity for Autodesk.

Autodesk shares have fallen 33% in the past year and trade at a market capitalization of $45 billion. In this fiscal year, management expects the company to generate just over $2 billion in free cash flow, giving the stock a forward price to free cash flow ratio of 22.7, just around the market average. For a company with a solid history of growth and tons of options with its new software, I think Autodesk is a great stock to pick up before the next big market rally.

2. Spotify: All About Digital Audio

Spotify (PLACE -4.40%) may operate in a completely different industry than Autodesk (music and audio streaming), but it has a similar setup for its business over the next decade. Like Autodesk, it has sustained subscription business in its premium music offering, which had grown to 195 million paying users worldwide at the end of last quarter. Investors should expect this segment to grow steadily as more people switch to music streaming from analog radio during this decade.

Outside of music streaming, Spotify is the world’s leading podcast player, a business it only entered with serious intentions less than five years ago. Over the past two years, it has acquired several studios and podcast distribution platforms, while signing dozens of deals with content creators like the Joe Rogan Experience. The number of users listening to podcasts on Spotify continues to grow every quarter, which is also attracting new users to start listening to music on the service.

To monetize podcasts, Spotify has created a dynamic ad marketplace that connects ads to podcast content. This is only a small part of the business today, as it only launched in 2021, but it could help accelerate Spotify’s overall revenue growth over the next few years. Eventually, management estimates that advertising could reach 30 to 40% of Spotify’s overall revenue compared to less than 15% today.

Spotify’s stock has been hit in 2022 with shares down 72% this year. Shareholders are clearly nervous about the company’s prospects right now, but with a market capitalization of just $15 billion, the stock looks incredibly cheap to me. The company generated $12.2 billion in revenue over the past twelve months and has a clear path to steadily increase that figure over the next decade.

Once it stops reinvesting so heavily for growth, management believes Spotify can achieve profit margins of 10%, which would equate to $1.22 billion in revenue at current levels. Compared to a market cap of $15 billion, that seems pretty cheap, and that’s why I think now is the time to jump on the Spotify bandwagon before the next bull market rally.

Brett Schafer holds positions at Autodesk and Spotify Technology. The Motley Fool holds positions and recommends Autodesk and Spotify Technology. The Motley Fool has a disclosure policy.

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