In a volatile market, growth stocks can offer tremendous upside for investors willing to stomach some risk. While many high-flying growth names have seen sizable corrections in 2022, the long-term growth narratives for many of these companies remain intact. As the macroeconomic environment improves in 2023 and beyond, some of the most beaten-down growth stocks could stage huge comebacks and post triple-digit returns within a 12-month period.
When times get tough, the first stocks investors tend to sell are those trading at lofty valuations. Growth stocks that are priced for perfection have borne the brunt of recent sell-offs, even though many of these companies continue to increase revenues and earnings at an impressive clip. However, growth trajectories and fundamentals often take a back seat to broad market sentiment in the short-run.
This phenomenon has created a unique opportunity for investors looking to accumulate shares in strong growth companies at a discount. Once the economic climate stabilizes and risk appetite returns, undervalued growth stocks could quickly rebound to prior valuation levels. Traders willing to look past short-term volatility can capitalize on this disconnect between price and fundamentals.
In particular, growth stocks with clear competitive advantages, leadership positions in large addressable markets, and excellent management teams seem poised for a comeback. While forecasting triple-digit returns is inherently speculative, certain companies’ fundamentals and growth runways make a compelling case. Let’s look at the following three.
PayPal (PYPL)
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Loading up on PayPal (NASDAQ:PYPL) stock seems more and more like a good idea. The fintech giant has plunged nearly 80% from its highs, as growth stalled due to a lack of new accounts and engagement from existing users. However, I believe the negativity is overdone, and PYPL stock offers a compelling risk/reward at current levels.
PayPal boasts over 431 million active accounts and processed a whopping $1.36 trillion in payments last year. The company continues to grow revenues at a 7% clip, even without substantial user growth, demonstrating the loyalty of its existing client base. While some investors are disappointed with the stagnating user metrics, I am encouraged by PayPal’s ability to squeeze more profit out of current users. That’s not all, since analysts expect roughly 9.6% sales compounded annual sales growth from 2023-2032 and double-digit earnings per share growth over that time frame.
The company has rolled out merchant services like PayPal Zettle to drive payment volume, expanded Pay with Venmo’s ubiquity, and boosted monetization with value-added services. These initiatives led to a jump in revenue last quarter, despite just a 0.5% rise in active accounts. PayPal is also aggressively cutting costs to support margins, intending to cut $900 million in expenses this year.
At 13-times forward earnings after the steep sell-off, PYPL stock now trades at a substantial discount to payment peers and the broader market. Plus, the company expects 2023 share buybacks to reach $5 billion. For a high-quality fintech leader with staying power, the current valuation undoubtedly offers an attractive risk/reward at current levels.
Alibaba (BABA)
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Chinese tech giant Alibaba (NYSE:BABA) has been rangebound for over a year, since plunging 65% from pandemic highs. With the stock treading water around $87 per share, I believe BABA offers substantial upside for patient investors willing to look past the near-term uncertainty.
Alibaba dominates China’s e-commerce industry, operating shopping platforms Taobao and Tmall that account for over half of online Chinese retail sales. Despite the challenged macro backdrop, Alibaba returned to revenue growth last quarter, with revenue increasing 14% year-over-year (6.5% converted to USD). Profitability is also improving, with operating margins expanding thanks to cost discipline.
Alibaba is making big bets on cloud computing and overseas expansion to diversify its core commerce business. These initiatives will require investment in the near-term, but position the company for sustainable growth over the long haul. Alibaba Cloud is China’s leading provider and grew revenue by 4% last quarter, while the company’s International Commerce segment saw revenue jump 41%.
Looking ahead, China’s economy is showing signs of recovery as COVID disruptions fade and stimulus kicks in. This should provide a natural tailwind for Alibaba’s commerce platforms. The company also just completed an internal restructuring, which I see as a positive.
While risks remain around China’s regulatory crackdown and economic slowdown, much of this negativity appears to already be priced into BABA stock. The company has a rock-solid balance sheet with $75 billion in cash to endure volatility, and the company trades at just 10-times forward earrings.
Moreover, Alibaba trades at just 10-times forward earnings, which makes the margin of safety quite strong for this growth stock. The consensus price target at $141.5 implies 62% upside in one year. It can easily deliver 100%-plus or more, if the broader market sentiment improves.
Endava (DAVA)
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Endava (NYSE:DAVA) is a U.K.-based firm that helps enterprise clients across a range of verticals like Payments, TMT, and Healthcare leverage emerging technologies to accelerate their businesses.
In 2023, DAVA stock has slowly turned a corner after sliding more than 70% off its highs. Shares have been creeping up as the company has sustained revenue growth above 20% despite the challenging macro environment.
Unlike most bloated IT consultancies, Endava maintains stellar profitability. The company boasts adjusted EBIT margins above 21% thanks to its asset-lite operating model and selective pursuit of high-value engagements. I expect rising profitability over time as Endava expands globally and moves up the value chain into areas like AI and automation.
However, DAVA stock trades at a reasonable 19-times forward earnings after the considerable drawdown. Endava possesses a strong balance sheet with minimal debt and over $245 million in cash to support growth initiatives.
With top-tier clients like Worldpay, BNP Paribas (OTCMKTS:BNPQY), and Virgin Media, Endava is embedded in the digital shift across industries. As enterprises ramp technology investments, I believe Endava has a long runway for above-market growth. The consensus $69 price target for DAVA stock represents a 35% one-year upside. I expect it to stage a faster turnaround and double in one year.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the biedexmarkets.com.com Publishing Guidelines.
