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3 Top Growth Stocks That Are Undervalued to Start 2022

By Nicholas Rossolillo – Dec 23, 2021 at 1:20AM

Key Points

  • Broadcom continues to enjoy growth from the massive semiconductor secular growth trend.
  • Crocs is winning over new customers in the pandemic era with its utilitarian rubber clogs.
  • Zynga's mobile games are still strong, and new games are on the way.

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Not all growth stocks carry nosebleed valuations.

After enduring a year's worth of beatings, many growth stocks are now trading on the cheap -- especially when considering the growth long runways that lie ahead of them. Still, some investors might be uncomfortable with the nosebleed valuations some stocks carry, especially those in the fastest-growing areas of the economy, like cloud computing.

Not to worry, not all growth stocks require sacrificing a proverbial arm and a leg to purchase. Three names that look downright undervalued headed into 2022 are Broadcom (AVGO 1.32%), Crocs (CROX 4.86%), and Zynga (ZNGA).

Someone using a smartphone, with a city skyline shown in the background.

Image source: Getty Images.

Broadcom: An aptly named play on tech building blocks

As its name suggests, Broadcom's offerings are indeed broad. It's a chip designer for everything from smartphones to data centers to networking infrastructure, as well as a provider of enterprise software to those engineers that make use of its hardware. And though it's one of the giants in the semiconductor industry, Broadcom is still putting up respectable growth numbers. 

During its 2021 fiscal year (the 12 months ended Oct. 31, 2021), revenue grew 15% to $27.5 billion, driven by an 18% gain in its semiconductor segment (three-quarters of sales) as Broadcom rebounded from a severe chip industry drought from the U.S.-China trade war a few years ago and pandemic effects in 2020. Infrastructure software (the remaining quarter of business), made up of acquisitions over the last few years, grew at only a 7% pace in 2021. But this software complements Broadcom's tech equipment design like bread and butter. The combined businesses generated $13.3 billion in free cash flow last year, up 15% and clocking in at a whopping 48% free cash flow profit margin. 

Broadcom is riding strong momentum into the new year. Management said on the last earnings call update that the total backlog for its products and services was $14.9 billion, which equates to a 15% increase from 12 months ago. And average delivery contracts are extending all the way out to 2.6 to 2.9 years down the road, as the global chip shortage has every sector of the economy scrambling to get its hands on semiconductors these days. Suffice it to say Broadcom's growth story is in pretty good shape for a while. 

This profit-generating machine is currently valued at just 21 times trailing 12-month free cash flow. It's the highest premium Broadcom stock has traded for in several years, but given the strong demand for its wares, it hardly looks overvalued at this juncture. 2022 could be another great year for this semiconductor leader trading at a great price. 

Crocs: Goofy shoes gone mainstream

2021 will go down as the year that my household bought its first pair of Crocs (a pair of the fuzz-lined variety, subbing as slippers in the house). After catching our attention with its ambitious expansion outlook for the next few years, we had to give them a try to see what all the rage was about. 

Granted, this consumer household isn't ready to go all in on the rubber clogs look, but a growing number of others certainly have. It's comfort and utility above all else in the pandemic era, and Crocs thinks it can capitalize on its resurgent popularity. By 2026, the quirky shoemaker thinks it can reach $5 billion in annual global sales. That represents a 260% increase over full-year 2021 expectations.

Is that overly optimistic? Perhaps, but whether you're a fan of these kicks or not, Crocs has actually been a growing company for years (in spite of temporarily losing some steam in the mid 2010s). Besides growing interest in comfy shoes, Crocs thinks it can achieve its lofty aspirations by doubling down on a couple of key fronts: more digital sales, and growing its very small presence in Asia.

Along the way, the company says it will sustain its leading shoe-industry profitability -- it should have an adjusted operating profit margin of at least 26% in 2026, compared to an expected adjusted operating profit of 28% this year. Given its rapid growth since the start of the pandemic and management's optimism that the good times will keep rolling, Crocs stock is a real value at just under 21 times trailing 12-month free cash flow as of this writing. Clearly some investors have their doubts too given the modest valuation for the forecast. But if Crocs can pull it off, this shoe company could be a great pickup in 2022.

Zynga: Mobile games are here to stay

Broadcom and Crocs had an incredible showing in 2021. The stocks are up a respective 47% and 110% with just two weeks to go until the new year. But mobile game developer Zynga, not so much. Shares have lost just over a third of their value as of this writing. 

The company responsible for such classics as Words With Friends and Farmville pulled off an incredible rebound in recent years, refocusing on live events and new content that mobile players love to stay engaged with. But a boom in new monthly users during the pandemic last year has given way to more pedestrian organic growth in 2021, and some investors have grown unimpressed with Zynga's recent acquisition spree (including Rollic, Chartboost, and StarLark) to build on its recent success. 

Specifically, at the end of September 2021, Zynga had an equal amount of cash and short-term investments as it did long-term debt (both at about $1.34 billion), up from no debt back in 2018, largely due to these recent takeovers. The 40% pace of sales growth Zynga reported in Q3 2021 was also highly driven by newly acquired games rather than growth from its pre-existing portfolio of video games. 

Nevertheless, the company expects it will maintain double-digit percentage sales growth in 2022 and beyond as it unlocks new advertising opportunities (via Chartboost) and launches new games (like the upcoming Star Wars: Hunters). And as it digests recent acquisitions, management said to expect profit margins to expand thanks to greater Zynga operational efficiency than ever. The stock currently trades for 25 times trailing 12-month free cash flow, a real bargain if this mobile game leader keeps expanding revenue and the bottom line in the years ahead like it's anticipating.

Nicholas Rossolillo and his clients own Broadcom Ltd, Crocs, and Zynga. The Motley Fool owns and recommends Zynga. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.

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