While it's tempting to turn to slower-growing stalwarts right now as the best option for new capital, since the market seems to be putting many faster-growing tech stocks in the penalty box, it's always worth considering whether it might make sense to be a contrarian and take the opposite stance as the market. After all, Warren Buffett has said to "be fearful when others are greedy and greedy when others are fearful."
Two stocks that took a huge beating in last week's growth stock sell-off were e-signature specialist DocuSign (DOCU -1.03%) and electric-car maker Tesla (TSLA -0.94%). Shares of DocuSign fell more than 45% and Tesla slid more than 6%. Over the past three months, the two stocks are down 46% and 20%, respectively.
Are these two stocks' beatings creating potential buying opportunities for bargain hunters?
While a sell-off of many growth stocks last week was probably one reason behind the slide in DocuSign's stock price, the main reason was the company's fiscal third-quarter earnings report. In the report, management provided fiscal fourth-quarter guidance that was significantly below analysts' estimates for the period.
Despite the guidance miss, investors should note that management's forecast still implies robust year-over-year growth, albeit at a decelerated rate -- especially when investors consider the year-ago comparison DocuSign is up against. Management said it expects fourth-quarter revenue to be between $557 million and $563 million. The midpoint of this guidance range translates to 30% growth -- and this growth is on top of 59% growth in the year-ago quarter.
But the stock's valuation doesn't suggest shares are exactly a bargain yet. Sure, DocuSign is impressively generating meaningful free cash flow, with $90 million in free cash flow in fiscal Q3 alone, but a market capitalization of $28 billion relative to quarterly free cash flows at this level implies that the stock is still trading at quite a premium. So while shares are certainly a better deal than they were two weeks ago, investors who are interested in buying the stock should realize that shares are still far from qualifying as "cheap."
What about Tesla? With the company's market capitalization back below $1 trillion, is now a good time to consider this investment? After all, Tesla's vehicle deliveries are soaring. Third-quarter Tesla vehicles sales rose 73% year over year. Unfortunately, however, shares of the electric-car maker aren't exactly a bargain yet either.
The growth stock's near-$1 trillion market capitalization is a huge premium over its $2.6 billion in trailing-12-month free cash flow -- even when considering that management is forecasting sales to grow at an average annualized rate of 50% over a "multiyear horizon."
With both DocuSign and Tesla shares still pricing in very optimistic futures, even after their shares have slid sharply, does this mean investors should part ways with the two stocks? Not necessarily.
While it's easy to let fear take over when stocks are sliding, investors should remember that stocks are more attractive when they are trading lower than when they are trading higher, assuming nothing has changed about the underlying businesses' long-term prospects.
So even though DocuSign and Tesla stock may not be in bargain territory after their recent sell-offs, they are definitely significantly more attractive than they were earlier this year. Selling after such big drops could be a mistake if these companies continue growing rapidly over the next decade.
Of course, there are always risks that these two companies' growth stories don't play out as well as expected. So investors who own the stocks should watch the underlying businesses closely to see if any new risks present themselves or current risks, such as competition, become even greater threats.