The market has fallen out of love with growth stocks recently. Between high inflation, the omicron coronavirus variant, the Federal Reserve's plans to raise interest rates and cut back on other economic stimulus initiatives, and underwhelming economic data, investors have had a litany of risk factors to consider. Lately, it seems like a new one pops up almost every other day.
Here's the good news: With the market getting skittish about growth stocks as a broad category, there are promising companies caught up in the pullback that now trade at huge discounts. Read on to see why a panel of Motley Fool contributors identified Despegar.com (DESP +0.00%), StoneCo (STNE 0.77%), and Chegg (CHGG 3.37%) as stocks with massive long-term upside.
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Don't miss out on this potentially explosive stock
Keith Noonan (Despegar.com): The last year has been a challenging one for many Latin American companies. Relatively high levels of inflation and instances of political and economic instability have made investors more cautious about stocks with substantial exposure to the region. In addition to these factors, travel booking specialist Despegar has been dealing with lingering challenges related to the coronavirus pandemic, and its valuation has taken a dramatic hit.
Despegar stock is down roughly 26% over the last year and roughly 46% from its 52-week high. The company now has a market capitalization of about $671.5 million and is valued at 1.3 times this year's expected sales. The upside is that the stock looks quite cheap at current prices, and there are signs of a powerful turnaround underway.
While the company's third-quarter bookings were still down 44% from the comparable pre-pandemic quarter in 2019, bookings were up 298% year over year and 34% on a sequential basis. Recent headwinds have been at the forefront of the market's focus, but key Latin American territories will likely benefit from an expanding middle class over the next decade and beyond, and the region's travel and hospitality industries are bouncing back and poised for big growth over the long term.
Despegar's strong market position and low valuation also makes it a potential acquisition target. Expedia already owns a 14% stake in the business, and it wouldn't be surprising to see the company or another player in the online travel agency space swoop in to buy out the company at a substantial premium. Despegar stock offers investors multiple paths to huge returns, and it stands out as a great buy after recent sell-offs.
Messed-up expectations create a rare opportunity
Jason Hall (StoneCo): It's been a brutal year for many fintech stocks, none more so than Brazilian payments and financial services company StoneCo. As of this writing, shares are down more than 80% from their all-time high, reached in early 2021, on a combination of high inflation stalling Brazil's economy, and that putting pressure on StoneCo's credit business.
But more broadly speaking, it looks like the sell-off in StoneCo's stock was exacerbated by the larger tech/growth stock decline over the past 11 months. StoneCo's focus on Brazil, with its struggling economy, has lost far more of its value than other fintech companies such as Block and Sea Limited, which offer similar (sometimes competing) services, but don't have concentrated exposure to a struggling economy like Brazil's.
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Yes, Brazil is a bit of an economic mess right now, but tying StoneCo's path forward exclusively to Brazil getting back on track economically misses the bigger opportunity. Brazil has higher rates of internet access than many other countries in Latin America, and the number of people with bank accounts is increasing.
But there is still a massive opportunity to help merchants with digital transformation. This includes tools for omnichannel management, payments, accounting, point-of-sale systems, and many others. And despite what the stock performance might have you think, StoneCo is still growing at a fast pace. Total product volume continues to grow, revenue in its native currency was up 57%, and the number of active payments clients more than doubled.
As a result, StoneCo stock is cheaper than it's ever been on a price-to-sales basis, trading for 7.2 times. That's a bargain price for this misunderstood company.
An education technology company with a strong moat
Parkev Tatevosian (Chegg): Education technology company Chegg is an excellent growth stock that's a screaming buy right now. Chegg helps students in college get through courses with less stress and more confidence.
Its website is home to over 70 million pieces of proprietary content that students can use to study for exams or complete an assignment. The step-by-step explanations of challenging concepts were created at students' request.
Subscribers to Chegg have the option to ask 20 questions per month that subject-matter experts answer. The question and explanation become available for all Chegg subscribers to learn from. It has taken years for Chegg to build out this database, making it time-consuming and expensive for any competitor considering encroaching in its space.
Indeed, Chegg has spent the better part of this last decade generating operating losses while building out the treasure trove of content assets. However, the company turned the corner in 2019 and earned $18 million in operating income, which rose to $57 million in 2020.
At 4.4 million subscribers, Chegg is also growing free cash flow. In the nine months ended Sept. 30, 2021, Chegg's free cash flow was $138 million, up from $68 million in the same time last year.
Moreover, investors can buy this growth stock at a bargain price. Chegg is trading at a price-to-free-cash-flow ratio of 25, near its lowest ever. Its price-to-sales ratio of 5.4 is the lowest since 2018. Meanwhile, Chegg has built out its content database, deepening its competitive advantage and reaching sufficient scale to generate healthy operating profits and free cash flow. For all those reasons, Chegg stock is a screaming buy right now.
