Finding bargains in today's stock market isn't easy.
Company valuations have stretched across the board as the S&P 500 has jumped about 75% from its March nadir, and both hard-hit "recovery stocks" like Disney and Starbucks and pandemic winners like Etsy and Peloton are trading near all-time highs.
Meanwhile, a bubble in areas like electric vehicles and renewable energy seems evident.
Still, some stocks seem to have fallen out of fashion with investors and a few of them still have strong growth prospects. Keep reading to see three of the cheapest growth stocks on the market you can buy right now.
Some of the best choices in investing are the obvious ones, and Facebook (FB 1.41%) offers a good example here.
The social media giant, which also owns Instagram, WhatsApp, and Oculus VR, has a powerful set of competitive advantages, including massive network effects, and what's essentially a duopoly in digital advertising with Alphabet's Google. The company's profit margins are among the best in the business world as it delivered a 38% operating margin in 2020 even as the company faced headwinds from the COVID-19 pandemic. Similarly, its revenue growth remained strong, reaching 33% year over year in the fourth quarter as it overcame a boycott earlier from some of its biggest advertisers.
Facebook has long been something of a lightning rod for controversy, at least since Russian hacking of the site in the 2016 election and the subsequent Cambridge Analytica scandal occurred, but that hasn't stopped the growth of the business. Users rose by double-digit percentages in the fourth quarter to 3.3 billion monthly actives across all of its properties.
Because of the above concerns, Facebook is actually trading at a discount to the S&P 500 at a price-to-earnings ratio of just 27 based on 2020 earnings. That seems like a mistake, especially since growth is likely to accelerate in 2021 as the pandemic fades.
Like Facebook, Alibaba (BABA -0.19%) has been a magnet for controversy recently. After founder Jack Ma made insulting remarks to financial regulators at an October conference, the Chinese government has appeared to have the tech giant in its sights. First, the government blocked the IPO of Ant Group, Alibaba's former financial arm, and in December it opened up an antitrust investigation against Alibaba, sending the stock tumbling.
Earlier this month, rumors swirled that Jack Ma was missing, though other reports said he was "laying low" to avoid public scrutiny. When he resurfaced on a videoconference call, Alibaba shares popped.
Investors seem to be exaggerating these risks here, however. First, Ma no longer holds a formal position in the company so his whereabouts or his standing with the Chinese government aren't as significant as they might seem. Secondly, Alibaba's own success is key to many of the things the government wants to accomplish, including being a technology leader, so it has no interest in severely damaging the company.
Alibaba's business itself remains as strong as ever. The company operates the biggest e-commerce marketplace in the world with an annual gross merchandise volume of more than $1 trillion and has growth businesses in areas like cloud, logistics, and digital media.
In the quarter ended last September, revenue rose 30% to $22.8 billion, and adjusted net income jumped 44% year over year to $6.9 billion, giving the company the same kind of impressive margins as Facebook.
Despite its robust growth and profitability, Alibaba is also cheaper than the average S&P 500 stock, trading at a P/E of just 28. While Chinese stocks do tend to trade at a discount because of regulatory concerns, Alibaba seems significantly undervalued even after accounting for that discrepancy.
The two stocks above are some of the biggest companies in the world, but there are also opportunities in smaller companies, which naturally offer more upside potential. Vroom (VRM 11.72%), an online used car dealer, offers one example as the company has missed out on the broader rally in e-commerce stocks during the pandemic.
Vroom shares popped on the company's IPO in June, but the stock price has actually fallen since then after the company disappointed in its two earnings reports. However, there's a good reason for that. Vroom scaled back on car purchasing during the lockdown period, so it was poorly prepared for the surge in demand that came later on as consumers bought cars to avoid public transportation and to address new needs during the crisis. That inventory imbalance weighed on results as overall revenue fell 3% in the second quarter and sales in its core e-commerce business rose 45%, down from triple-digit percentage growth in the first quarter, and those figures underwhelmed again in the third quarter. Its overall numbers include a dealership in Texas and a wholesale business, but investors should focus on the e-commerce segment.
Vroom's business should begin to normalize as it recovers from the inventory drought. Demand for used cars is expected to remain strong through 2021 as Americans continue to adjust to new lifestyles around remote work and other changes. Its e-commerce platform gives it an advantage during the pandemic, and its 2021 numbers should be strong as it laps the impact of the lockdowns in the crisis. Meanwhile, analysts expect revenue to surge 85% this year, and e-commerce is likely to grow faster than that.
Despite those prospects, the stock still looks cheap, trading at a modest price-to-sales ratio of 2.5, which is less than its bigger rival Carvana or e-commerce kingpin Amazon. Vroom isn't yet profitable as the company is investing in its e-commerce platform, but gross margins are moving in the right direction, which is a positive sign. With Vroom's potential for triple-digit revenue growth in the coming quarters, growth stock investors shouldn't ignore this e-commerce disruptor.