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2 Beaten-Down Growth Stocks to Buy Right Now

By Will Ebiefung – Aug 14, 2021 at 7:30AM

Key Points

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Shares in Zynga and Fiverr are crashing. Here's why that could be the buying opportunity you've been waiting for.

Long-term investors shouldn't fear drawdowns -- which is Wall Street lingo for a stock price dip. Declines are excellent opportunities to bet on top-quality companies at more affordable prices. Zynga (ZNGA) and Fiverr (FVRR -2.37%) fit the bill. Both companies are coming off of weaker-than-expected earnings, but they look poised to bounce back better than ever. Keep reading to find out why. 

1. Zynga 

Zynga is a mobile game developer that drives growth through synergistic acquisitions. Recently, its business hit a roadblock on weaker-than-expected guidance as pandemic-related tailwinds fade in the video game industry. But Zynga can prove its naysayers wrong by unlocking value in its acquired assets and expanding internationally. 

Growing stock chart on fire.

Image source: Getty Images.

Second-quarter earnings were a mixed bag. Although revenue soared 59% to $720 million (beating expectations by $40 million), management expects it to grow just 38% to $2.7 billion in full-year 2021, with booking sessions of $2.8 billion. This guidance disappointed analysts at Barclays and other firms, which also cited Apple's privacy changes (which may increase customer acquisition costs for mobile apps) as a factor in their downgrades. The easing of the coronavirus pandemic is another likely culprit for the slowdown. 

Zynga's long-term thesis still looks intact because it is just beginning to incorporate many of its most transformational acquisitions.

In the second quarter, the company closed its buyout of advertising platform Chartboost, which management believes can enhance monetization across Zynga's entire game portfolio and advertising partners. The $525 million acquisition of Chinese game developer Starlark also boosts Zynga's access to the Chinese market and its development talent. 

Zynga trades for a forward price-to-earnings (P/E) multiple of 33, which looks reasonable for such a fast-growing company. Rivals Activision Blizzard and Electronic Arts trade for P/E ratios of 24 and 22, respectively, but they reported lower top-line growth rates in the second quarter (negative 7.6% and negative 4%).

2. Fiverr 

Like Zynga, Fiverr is another stay-at-home stock facing challenges as the world reopens. Sales are still growing at a massive clip, but future guidance has softened as people spend less time online. Investors should look at this dip (shares are down 23% since earnings) as a buying opportunity because Fiverr's long-term thesis -- an excellent way to bet on the freelancing megatrend -- remains intact. 

First-quarter revenue surged 60% to $75.3 million based on healthy active buyer growth (up 43% to 4 million) and spend per buyer, which increased 23% to $226. Management is guiding for full-year revenue growth of 48% to 52% as pandemic tailwinds fade, which disappointed many on Wall Street.

But investors should keep a long-term perspective. 

Analysts at Orbis Research expect the global freelance platform market to expand at a compound annual growth rate (CAGR) of 15.3% to $9.2 billion by 2026. Fiverr can continue outperforming the industry through competitive advantages like a user base of 4 million active buyers and unique functionality. Unlike rival Upwork, where clients post jobs for freelancers, Fiverr allows freelancers to advertise their skills to clients ready to buy services. This business model could give the platform an edge in attracting short-term projects. 

With a price-to-sales multiple of 26, Fiverr isn't cheap -- which suggests many are very optimistic about its prospects in the freelancing industry. The recent sell-off is a much-needed breather that could serve as a buying opportunity for new money. 

Getting back to reality 

The coronavirus pandemic boosted stay-at-home companies like Zynga and Fiverr, but they will face tough comps as the crisis normalizes. The long-term theses for these companies still stand strong as they penetrate international markets and benefit from the freelancing megatrend. The recent sell-offs look like potential buying opportunities. 

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard, Apple, Fiverr International, and Zynga. The Motley Fool recommends Electronic Arts and Upwork and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

Stocks Mentioned

Zynga Stock Quote
Zynga
ZNGA
Fiverr International Stock Quote
Fiverr International
FVRR
$30.85 (-2.37%) $0.75

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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