Friday, May 27 2022

Rising interest rates have always meant tough times for growth stocks. With the Federal Reserve already raising rates once in 2022 and signaling six more significant hikes before the end of the year, companies trading at growth-dependent valuations have been under pressure. Worse still, geopolitical pressures and worrying results from some top industry leaders have also undermined investor confidence.

These days, you don’t have to look too far to find tech stocks that are trading down more than 70% from recent highs. Some of these companies will end up offering huge returns to long-term investors, but investors should always be smart about which ones they put their money in. With that in mind, a panel of Motley Fool contributors identified the top picks from the crowd of battered growth stocks.

Image source: Getty Images.

This e-commerce disruptor is trading for valuations at 2017 levels

Jason Hall: We are in the era of e-commerce. It doesn’t matter what company you work in today; if you sell goods or services to customers, you need a website that can facilitate every part of customer engagement. And if your business also relies on physical stores, having the right technology partner to help you manage and integrate everything is extremely important.

Shopify (STORE -3.71%) has become, by far, the leader in providing merchants with solutions to commerce challenges, both in person and online. Since its inception in 2006, it has steadily added more and more tools, including payments, marketing, integration with other e-commerce channels, shipping, and fulfillment.

A chart showing Shopify's product and partner growth.

Image source: Shopify.

This accelerated its growth. Shopify’s revenue grew 57% in 2021, continuing the momentum of 2020, when so many businesses rushed to expand their online capabilities. For context, the 57% revenue growth last year was stronger than the 47% growth in 2019. Despite market concerns, this is not a pandemic stock.

Another data point to demonstrate just how powerful Shopify’s business is: its market share fell from 8.6% in 2020 to 10.3% in 2021. Alone Amazon took more share – from 39% to 41% – and none of the top 10 increased their share by such a large percentage.

Still, Mr. Market’s massive tech sell-off — along with concerns over Shopify’s plans to expand into the lower-return, higher-capital fulfillment space to support its merchants — has led investors to sell Shopify shares down 75% from highs. Today’s price should make it a huge winner for investors over the next decade.

This social media stock has a huge market opportunity

Parkev Tatevosyan: My most downcast growth stock to buy now is pinterest (PINS -3.21%). The image-based social media site flourished at the start of the pandemic, adding millions of users and seeing a surge in engagement from existing customers. The economic reopening reversed that trend, and Pinterest lost some of that momentum it had gained at the start of the outbreak. As a result, the stock has been hammered and is down 78% from its peak.

PINS Price to Free Cash Flow Chart

PINS prices versus free cash flow given by Y-Charts

This created an opportunity for long-term investors to buy the stock at its lowest valuations. Pinterest trades at a price-to-free cash flow ratio of 17.55 and a price-to-earnings ratio of 42. These are good valuations for a company with Pinterest’s growth prospects.

The company has 433 million monthly active users, up 2 million from the previous quarter. The platform is free and only earns money by displaying advertisements to users browsing the platform. And judging by Pinterest’s revenue growth of 60%, 51%, 48%, and 52% over the previous four years, marketers must be getting a good return on their spend because they keep coming back for more. ask again.

Plus, Pinterest has plenty of room to continue to grow. It generated $2.6 billion in revenue in 2021. To put that number into context, advertisers spent $763 billion globally in the same year. So despite its rapid growth, Pinterest still captures a small slice of the pie. Of course, Pinterest faces near-term headwinds with the reopening of economies and supply chain shortages dampening advertiser demand. However, a cheap valuation, proven growth, and massive total addressable market make Pinterest stock a great buy.

This streaming player can show explosive returns

Keith Noonan: Between high levels of inflation, impending interest rate hikes, and a litany of other potential downside catalysts, there are a ton of risk factors investors need to consider right now. When this type of dynamic is in play, it’s not uncommon to see investors “reassessing” entire industries and even the market as a whole. make things worse for Roku (ROKU 1.39%)the streaming hardware and digital advertising company faces tough growth comparisons as it goes through periods of very high pandemic performance.

While Roku is a category leader in set-top boxes and smart TV streaming hardware, it’s the opportunities these strong hardware positions have created in digital advertising that are even more critical to earnings growth potential. long term of the business. The fact that it is not currently posting profits could be a sticking point for investors in the current market climate, but this company looks set to deliver exceptional long-term performance. The streaming leader closed the period with 61.3 million active accounts, up 14% year-on-year, and average revenue per user (ARPU) soared 34% year-on-year the other to reach $42.91.

With a market capitalization of around $11.5 billion and the company valued at around 3.1 times this year’s expected sales, Roku is trading down 80% from its peak and hardly seems valued significantly. unreasonable even if it is not currently showing profits. The streaming innovator has pursued a build and expand approach, and the approach of building a large user base and then working to improve monetization will likely prove very rewarding in the long run.

In a recent interview, Evercore analyst Shweta Khajuria said the company sees the potential for Roku to increase its ARPU more than three times from current levels. The streaming company continues to add users at an encouraging rate, and it should be in a position to reap big gains as advertising continues to shift away from traditional TV distribution and into streaming.

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