The U.S. equity market has been quite volatile for the past two years. Growth stocks, which have been the darling of the stock market for the past decade, are now seeing a dramatic decline in share prices. Investors are increasingly worried about the effects of high and sticky inflation, supply chain constraints, labor shortages, and the pace of global economic recovery. The rapid surge in COVID-19 omicron variant cases has further added to the market's woes.
The weakening in investor sentiment has been especially detrimental to growth stocks, which had long enjoyed skyrocketing valuations. While correction in share prices was justified for many of these stocks, some, such as Affirm (AFRM 0.91%) and CrowdStrike (CRWD 0.14%), seem to have been excessively punished despite solid business models and healthy financials. Hence, there remains a solid chance of correction in these stocks in 2022.
Let's see why these stocks could earn healthy returns for retail investors in 2022.
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1. Affirm: Implied upside of 112%
The pure-play buy now, pay later (BNPL) company Affirm has seen its shares tank by over 60% from its high of $176.55 on Nov. 8. Affirm enables consumers to pay for their online purchases from merchants in easy loan installments without any down payment. Much of the decline in share prices of this fintech company can be attributed to the recent sell-off in growth stocks. In December 2021, the Consumer Financial Protection Bureau (CFPB) launched an inquiry into the practices of five BNPL players, including Affirm. This has further affected the overall investor sentiment for the company.
However, such a steep sell-off in Affirm's shares seems overdone, considering that the global BNPL market is expected to grow from $90.69 billion in 2020 to $3.98 trillion in 2030. As an early mover and the largest stand-alone BNPL player in the world, Affirm is well-positioned to leverage this opportunity in the coming years.
Affirm's strategy of partnering with Shopify has led to a dramatic expansion in its merchant network to 102,000 active merchants in the first quarter of fiscal 2022 (ending Sep. 30, 2021), a significant jump from 6,500 merchants in the same quarter of the prior year. Since Affirm functions as a customer acquisition partner for merchants and helps them secure higher-quality customers, the company charges a commission fee for these services.
The company has already partnered with over 60% of the U.S. e-commerce players, including dominant retailers such as Shopify, Amazon, and Walmart. These partnerships have also helped in expanding the company's customer base by 124% year over year to 8.7 million. This, in turn, is translating into higher interest income for the company. The broad merchant and customer base has also created significant network effects for Affirm.
In the first quarter, Affirm's revenues soared by 55% year over year to $269.4 million, while gross merchandise volume (GMV) was up 84% year over year to $2.7 billion. The company, however, is unprofitable due to high spending in technology and marketing as well as in its recent spate of acquisitions.
However, considering the raised fiscal 2022 revenue targets, a potentially very lucrative partnership with Amazon, and the planned release of the first debit card that allows customers to pay in installments in 2022, Affirm seems well poised to achieve its 12-month target price of $146.36.
2. CrowdStrike: Implied upside of 64%
Leading cloud-based cybersecurity player CrowdStrike's shares are down by around 40% from its high of $298.48 on Nov. 10. The sell-off seems overdone, especially since the company surpassed both its revenue and adjusted earnings estimates in the third quarter (ending Oct. 1, 2021).
CrowdStrike also reported a solid 67% year-over-year jump in annual recurring revenue (ARR) (subscription-based) to $1.5 billion. Net new ARR (ARR earned in the third quarter) was up by 46% year over year to $170 million. Being a software-as-a-service (SaaS) company, ARR helps in assessing the revenue visibility of CrowdStrike for the coming quarters.
International Data Corporation has rated the company as a leading endpoint security (securing end-user devices such as laptops, tablets, and mobiles as well as servers and virtual environments) player, with 14.2% of the global market share. According to Verified Market Research, endpoint security market size is expected to expand from $13.43 billion in 2020 to $24.70 billion in 2028.
Additionally, CrowdStrike's Falcon cybersecurity platform provides workload security solutions (security for applications and services running on the endpoints, either on-premise or in the cloud environment).
CrowdStrike enjoys a strong moat in the cybersecurity business. Despite intense competition from the likes of Microsoft and Palo Alto Networks, the company grew its subscription customer base by 75% year over year to 14,687 customers in the third quarter. Currently, 68% of the customers are using four or more of Falcon's 21 modules.
These metrics not only highlight the company's success in new customer acquisition, but also in its cross-selling strategy. When existing enterprise customers opt for more modules, it helps boost the company's profit margins. Additionally, it helps embed CrowdStrike's solutions deeper in the customers' ecosystems, thereby making it inconvenient and resource-intensive for them to switch to the competition.
CrowdStrike is not yet profitable, but it is cash flow positive. The company's recent acquisitions, such as cloud log management and observability player Humio and next-generation data protection company SecureCircle, will play a major role in strengthening its product offerings. Against the backdrop of a leadership position, sticky and growing customer base, and solid financials, the 12-month target price of $290.67 seems quite achievable for the company.
