3 growth stocks down between 40% and 89% that could soar
Even with a recent market rally, many growth stocks are plummeting from their highs. heavy growth Nasdaq Compound The index is still on the verge of a bear market, but for investors prepared to weather potential volatility, the good news is that some high-potential companies are still trading at huge discounts.
To help put investors on the trail of growth stocks capable of delivering explosive returns, a panel of Motley Fool contributors profiled the top picks trading at attractive valuation levels. Read on to find out why they believe long-term investors can reap big rewards investing in Advanced micro-systems (AMD 2.76%), Cloudy (REPORT 3.58%)and RingCentral (RNG 4.47%) at today’s prices.
A lesson in growth over value
Daniel Foelber (advanced microdevices): AMD Stock Is Down Nearly 40% From Its All-Time High, Worse Than The 27% Drop iShares Semiconductor ETF endured. However, AMD continues to gobble up market share and grow revenue and earnings at a blistering pace while maintaining a high gross profit margin. The five-year chart says it all, as AMD’s revenue over the past 12 months has more than tripled in five years and profits have grown more than 37 times.
AMD’s latest quarter included better-than-expected results and strong long-term guidance that supports the narrative that AMD continues to take market share from Intel (INTC 1.46%) in the PC processor industry. For several years now, AMD has under-promised and over-delivered while Intel has spent most of the past decade dealing with delays, project failures and slowing growth. Intel stock has paid the price, underperforming the market in recent years, and failed to surpass its all-time high in 2000, just before the dot-com crash. Intel has a price-to-earnings (P/E) ratio of just 7.5 and a dividend yield of 4.1%, while AMD’s P/E ratio is a much more expensive 42.5 and doesn’t pay out of dividend.
AMD stands out as the best and fastest growing company, while Intel is the cheapest stock with an added dividend. But Intel thinks the worst is behind it. On its second quarter 2022 earnings call, Intel Chief Financial Officer David Zinsner said, “The market turbulence and updated outlook are disappointing. However, we believe our turnaround is clearly taking shape and we we expect the second and third quarters to be the company’s financial trough.”
Unfortunately for Intel, it failed to embrace the smartphone revolution and fell behind in its core categories. The chip industry is growing extremely fast where just a few years make a big difference. AMD has given investors every sign that it is leading the next wave of semiconductor technologies, while Intel has given every reason why it should continue to underperform. Until Intel can deliver on its promises, AMD stands out as the best buy despite being a more expensive stock. Comparing AMD to Intel is a good lesson in what “value” really means. If AMD continues to gain market share, it could one day overtake Intel in terms of revenue and profit. Long-term investors are more interested in where a company is in 10 years from now than where it is now. By this logic, AMD appears to be a better value than Intel, even though its current earnings to market capitalization is much lower.
Invest in the evolution of the Internet
Keith Noonan (Cloudflare): When it comes to making sure your favorite internet destinations are accessible and working properly, few companies are more important than Cloudflare. Web Specialist provides Content Delivery Network (CDN) services that accelerate the ability to send and access information over the Internet. It also offers Distributed Denial of Service (DDoS) attack protection, along with a variety of other cloud-based software offerings that help ensure users can easily access websites and applications.
However, Cloudflare also has a valuation heavily dependent on growth, and it has seen a sell-off as inflation, rising interest rates and other factors have caused investors to become much more risk averse. The stock is now trading down around 64.5% from the high it hit last November.
Despite the big sell-off, Cloudflare has continued to post impressive business results and looks poised for greater long-term growth. Sales climbed 54% year-over-year in the second quarter to $234.5 million, and the company increased its number of large customers by 212 to 1,749 during the period. With large customers now accounting for 60% of sales, Cloudflare’s growth engine looks very strong, and the non-GAAP (adjusted) gross margin of 78.9% last quarter indicates significant earnings growth potential across the line.
The company should be able to continue to show strong sales growth as it provides virtually essential services in the information age. With more websites and apps constantly online, and internet services becoming more central to business and day-to-day communications, Cloudflare stock looks set to offer big gains for long-term investors. .
This is the opportunity to ring at your door
James Brumley (Central Ring): I understand why investors began to seriously sell their RingCentral shares early last year. The stock of doorbells and home security skyrocketed at the start of the COVID-19 pandemic, when people were spending much more time at home and making many home improvements. However, once the lockdowns started to loosen, the market began to realize that the 124% rise in this ticker in 2020 after the 100% advance in 2019 was just too, too fast.
However, this stock’s 89% pullback from the 2021 peak is equally exaggerated…for the opposite reason.
Largely lost in the noise of all this volatility, this company continues to grow, and it does so primarily through its subscription business.
The figures for the last quarter put things in perspective. Revenue rose 28% year over year, pushing non-GAAP earnings from $0.32 per share to $0.45. The company is looking for revenue growth in the same direction for the rest of the year, but RingCentral has raised its earnings forecast from a range of $1.83 to $1.87 to a range of $1.91 to $1.95 per share for 2022. Notably, subscription revenue makes up 95% of its total revenue, which typically represents high-margin revenue because once in the fold, those customers no longer need to be reconquered.
In this vein, a sharp increase in sales and marketing expenses is the main reason why the company continues to lose money according to generally accepted accounting principles (GAAP).
For investors who can look further, the opportunity is there. It will take just a little more for RingCentral to achieve the scale it needs. However, with most of its value wiped out, the stock could start bouncing back long before that happens, in anticipation of such a development.