They may be the companies behind some of the U.S.'s most compelling growth stock stories. But shares of NovoCure (NVCR +0.00%), Pinterest (PINS +0.39%), and MarketAxess (MKTX +2.15%) have been strangely poor performers this year, with prices down 46%, 39%, and 38% (respectively) since the end of 2020. For perspective, as of the first day of December, the Nasdaq Composite (^IXIC +0.54%) is up by an incredible 23% year to date. That's a huge disparity.
And yet, smart investors know that this sort of volatility can also spell opportunity. Bearish rhetoric may have done some short-term damage, but value is always eventually reflected in the long run.
Image source: Getty Images.
The question is, do these three growth stocks actually have buy-worthy value at their current prices?
Up-ended
Of the three companies in question, only one is really a household name -- Pinterest. The unique social media platform allows users to collect digital clippings of things they're interested in and organize them by topic. It boasts 444 million monthly users as of the end of September, but it has only recently stepped up the monetization of this crowd by showing them more (and more-targeted) ads.
The market loved the timing of the ramped-up effort, though, as it largely coincided with last year's lockdowns that left people stuck at home, bored, with little else to do. All told, Pinterest shares soared more than 260% last year. The problem was that the surge was a bit too much, too fast, inviting profit-taking for the better part of this year as investors began realizing that this online social gathering place still has work to do.
MarketAxess's story is similar, even if rooted in a different reason. While online stock trading has been mainstreamed for a couple of decades now, online bond trading is a different story. The bond market isn't quite as transparent as the equity market is, and information about bonds -- individual and as a whole -- is scant. MarketAxess is fixing this by bringing better pricing information and bond market insight to more than 1,800 institutional clients, many of which serve retail clients of their own.
Last year's dip in interest rates, along with sheer market volatility, produced a major swell of demand for MarketAxess's services, along with a corresponding swell of demand for the stock. With the bond trading frenzy finally cooling off, though, so too has the demand for the company's shares.
As for biotech company NovoCure, it's yet another name that did a little too well for its own good in 2020, setting up a 2021 pullback.
Surprisingly, last year's 100%-plus gain for NovoCure shares wasn't the result of the company's work on a COVID-19 vaccine. NovoCure stuck to its cancer-fighting roots, and investors celebrated progress on that front. It also continued to pump up its revenue while paring down its losses.
Last year's top line of $494 million was 40% better than 2019's revenue, and NovoCure even swung from a full-year loss of $7.2 million to an operating income of nearly $20 million. Those numbers extend a hot trend that should persist well into next year too, even if the relative growth pace starts to cool due to year-over-year comparisons. Unfortunately, the market's starting to notice just how ungrounded this company still is, and how expensive NovoCure shares are compared to its projected results.
Still on track
Given last year's extreme bullishness from all three of these names, this year's marked weakness makes sense. What's been obscured, however, is that nothing's really changed about these growth stories. They're all still compelling.
NovoCure's current portfolio is already solid, but with drugs for lung cancer, ovarian cancer, pancreatic cancer, and brain metastasis treatments all built around the same proven biotechnology now in phase 3 trials (or already sent to the U.S. Food and Drug Administration for approval), there's a basis for more of the same kind of growth we've seen of late.
Next year's expected revenue growth of less than 9% isn't exactly thrilling, but this outfit has proven to be a very, very reliable grower even if it's in the habit of coming up short of earnings estimates. This might put things in perspective: Although they essentially rate it a mere "hold," the analyst community still sports a consensus price target of nearly $145 per share. That's 55% better than the stock's current value.
MarketAxess isn't going to reproduce 2020's heroic numbers in 2021. Revenue is on pace to grow a modest 3% this year, but actual profits are apt to slide by nearly 10%. Looking past this wild couple of years, though, growing interest in bonds should restore this company's pre-pandemic growth.
Look for sales growth of 12% next year to carry profits to a record-breaking $7.90 per share. The Federal Reserve's outlook for something between six and eight quarter-point increases in the federal funds rate through 2024 could easily fuel more interest in bonds too, as their yields will rise in tandem with the Fed's base rate.
As for Pinterest, sure, it's still refining its business model. It's a great model, though, and as the web's more familiar social networking platforms like Meta Platforms' Facebook and Twitter continue inching toward the middle of the public's and regulators' crosshairs, more casual venues like Pinterest are positioned to become top destinations. Underscoring this idea is next year's projected sales growth of 26% and a corresponding 23% in earnings.
Pinterest's monetization efforts are really starting to get traction, and new revenue-bearing widgets continue to materialize. For instance, in April Pinterest unveiled Creator Code to help users better manage their "pins" page followers, and in July it introduced a war for members to monetize the interest pages they're sharing with others.
Trade them like the growth stocks they are
Investors familiar with these three stocks are apt to know they're also expensive here despite this year's pullbacks. On a generally accepted accounting principles (GAAP) basis, Novocure is still in the red, in fact.
Don't dwell too much on their valuations, though. Right or wrong, these stocks' backstories and their corresponding companies' growth rates are more than capable of supporting frothy valuations that may not be sustainable for slower-growing names. This dynamic typically means excessive volatility in both directions, but this year's volatility is translating into good buying opportunities now for all three stocks.
