Growth stocks tend to get hardest in any market sell-off. Investors interested in taking on a little more risk with the potential for market-beating growth may be able to snatch up some undervalued growth stocks when the market takes a turn.
Undervalued growth stocks are shares of companies that have established strong businesses with competitive advantages and are still growing quickly. Market conditions may have presented temporary setbacks, resulting in a decline in share prices. Nonetheless, the long-term outlook for these companies remains strong, so they’re very likely to bounce back.
Six undervalued growth stocks in 2024
Six undervalued growth stocks in 2024
1. Uber
1. Uber
Uber is the largest ride-sharing company outside of China. It’s developed a network advantage due to the size of both its customer base and the number of people driving for Uber. Both are showing strong growth coming out of the pandemic. What’s more, Uber One -- Uber’s subscription offering discounted rides, food, and beverages -- has more than 10 million members, strengthening its network effect.
Uber expects gross bookings to climb to at least $165 billion by 2024. It’s not unreasonable to expect the enterprise value of a gig economy stock such as Uber to climb to a level equal to a 1x multiple of gross bookings.
Over the long term, Uber should see its gross margin expand as a result of its network effect and increasing Uber One subscriptions. And, while it may invest in new areas that affect bottom-line profits, that’s exactly what a great growth company will do.
2. Meta Platforms
2. Meta Platforms
Meta Platforms is the largest social media company in the world. Almost 3 billion people use at least one of its apps -- Facebook, Instagram, WhatsApp, or Messenger -- on a daily basis. Despite its considerable size and growing competition, Meta continues to expand its user base, indicating a strong network effect working in its favor.
Meta’s earnings have been affected by changes in Apple’s (AAPL -0.6%) iOS data-sharing policies, making it harder to track advertising efficacy, as well as by an uncertain economic environment. Both have led marketers to pull back on ad spending on its platforms. Still, the long-term outlook favors Meta since digital advertising is set to continue taking a growing share of marketers’ budgets.
As Meta moves past the hurdles, it should resume strong revenue growth and produce an expanding operating margin as it leverages research and development efforts in ad technology and virtual reality. Improved EBITDA results should lead the stock to recover toward the enterprise value/EBITDA multiple of its peers around 13x.
Using EV/EBITDA instead of a simpler valuation metric such as P/E allows investors to include debt in their valuation and negates the impact of one-time expenses or windfalls. Additionally, when comparing the valuation to other companies in an industry, it allows you to compare those with different capital structures. This means a company funded by a lot of debt is on even footing with a company funded by mostly equity.
3. Etsy
3. Etsy
Etsy has crafted a niche offering in the world of e-commerce. It’s the leading online marketplace for non-commoditized products such as crafts, used musical instruments, and vintage clothing. Its uniqueness helps Etsy stand out in a world dominated by internet retail giants such as Amazon (AMZN 2.29%). You go to Etsy for things you can’t find anywhere else.
Etsy got a massive boost from the COVID-19 pandemic, when it became one of the few places to procure a face mask. And, it’s successfully sustained the influx of customers and continued to increase active buyers. The nature of its product catalog insulates it from supply-chain issues that have held back its competitors.
Still, shares of Etsy have dropped amid the broad market pullback. While inflation concerns and other economic uncertainties remain a headwind, the competitive advantages of Etsy’s buyer and seller network and differentiated products should allow it to expand its bottom line over the long term. Post-pandemic, it has a much larger user base to leverage, which also should lead to expanding operating margins. Shares can be expected to climb back toward Etsy’s pre-pandemic EV/EBITDA ratio of between 40x and 50x.
4. Taiwan Semiconductor Manufacturing
4. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing, or TSMC, is the world’s largest chip foundry. When a tech company designs a circuit, they contact TSMC to produce it. That’s because the chipmaker not only has the facilities to pump out a lot of chips, but it also has the capability to produce some of the most advanced ones.
TSMC’s existing relationships with some of the biggest tech companies in the world allow it to confidently invest in research and development, creating a virtuous cycle where its customers design new chips using its leading-edge technology, which only TSMC has the capability to produce for them.
The company’s stock has been dragged down with other foundries on worries of raw material supply shortages and political risks. But management is focused on the long term and is investing ahead of the expected growth in the industry spurred by 5G connections, AI, the Internet of Things, and high-performance computing.
Management expects revenue to grow 15% to 20% annually over the long term, and the stock trades for a single-digit multiple of sales. Investors should expect that multiple to climb well into the double digits if management’s predictions are accurate.
5. Salesforce
5. Salesforce
Salesforce offers a leading enterprise software solution for customer relationship management, customer service, marketing automation, and other applications. It was a pioneer in the software-as-a-service model, which allows users to access the platform from anywhere with a web connection and ensures that everyone is using the latest version of its software.
Salesforce’s growing suite of applications -- fueled by internal development and external acquisitions -- all benefit from integration with one another. When Salesforce sells a company on one solution, it often gets them to take multiple solutions, increasing revenue and margins. It also makes customers less likely to churn. Churn has steadily declined over the years. Revenue attrition fell to record lows in 2022.
But Salesforce is experiencing headwinds in 2022 from negative changes in foreign exchange rates and economic uncertainty. As a result, it’s taken longer than expected for it to close deals, and its revenue has been pressured, leading management to lower its outlook for the full year and investors to sell off the stock.
But the long-term outlook for Salesforce remains strong. Management expects its market to grow by a rate of 13% annually through 2025. It has the advantages of a strong network effect, resulting in strong customer retention and cross-sales, which should allow it to increase revenue faster than the market. Consequently, investors should expect its EV-to-Revenue ratio to climb closer to its five-year median of around 8.7.
Growth stocks are often undervalued during a broad market turndown, which can create ideal buying opportunities.
6. ServiceNow
6. ServiceNow
ServiceNow provides cloud solutions for IT service management and IT operations management, allowing them to make sure that company systems operate as smoothly as possible by helping to identify issues and correct them with a focus on automation. It has contracts worth in excess of $1 million with more than 1,400 of the biggest companies in the world.
Over the past few years, ServiceNow has expanded its offerings beyond the IT department to include human resources, customer service, and finance. The expansion has allowed it to increase its average contract value, with more of its top contracts taking multiple services. The changes have also helped it increase its renewal rate to 99%.
Importantly, there’s a lot of room left for ServiceNow to grow. Despite already contracting with 80% of the Fortune 500, management believes it can “win more logos.” Management says its addressable market is the 50,000 companies with more than 1,000 employees and $100 million in annual revenue. With just 7,400 current contracts, it’s penetrated less than 15% of that market.
Investors should expect shares to return to a valuation above their five-year median EV-to-Revenue ratio of 16 as it expands contract value while still attracting new clients, leading to sustained strong revenue growth.
Related investing topics
How to find undervalued growth stocks
How to find undervalued growth stocks
The opportunity to pick up shares of undervalued stocks often presents itself when there’s a broad market downturn or when a company faces temporary headwinds. But you can’t just buy any growth stock when trouble hits. You need to focus on companies with durable competitive advantages. These companies will have the strength to survive a downturn, and they’ll likely emerge from such periods even stronger than before.
If a company is trading well below its historical valuation because of a temporary setback but has the wherewithal to withstand a downturn, it could be a great opportunity for growth investors to pick up shares.
