Over the past several months, rising interest rates have caused many investors to reduce their exposure to higher-growth tech stocks. At the beginning of the year, I also sold a few of my weaker growth stocks -- including Snap, Pinterest, Palantir, and Bumble -- to raise more cash.
I spent some of that cash on more conservative blue-chip tech stocks, but I also scooped up more shares of other beaten-down growth stocks. Here are two high-growth stocks I still increased my exposure to, even as rising interest rates created a hostile market for the entire cohort.
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1. PayPal Holdings
PayPal Holdings' (PYPL 0.11%) stock lost more than 40% of its value over the past six months as investors fretted over its slowing revenue growth and declining margins. Its rumored interest in acquiring Pinterest, which quickly fizzled out, also seemed like a desperate bid to expand its user base and hop aboard the "social commerce" bandwagon than a well-conceived strategy.
But if we cut through all that noise, PayPal is still a rock-solid company. It expects its revenue and adjusted earnings to grow approximately 18% and 19%, respectively, this year. Its growth has decelerated since 2020, but that slowdown was mainly caused by tough comps to the pandemic, which boosted online spending and digital payments instead of any fundamental problems.
PayPal has also repeatedly reiterated its long-term goals for more than doubling its annual revenue -- from $21.5 billion in 2020 to over $50 billion in 2025 -- and for its earnings to grow at a compound annual growth rate (CAGR) of 22% during those five years. It expects its number of active accounts to jump from 416 million in its latest quarter to 750 million in 2025.
PayPal expects that growth to be led by Venmo, its peer-to-peer payments app, which serves over 80 million users, and its new "super app," which bundles together digital payments, savings accounts, cryptocurrency purchases, buy now, pay later (BNPL) tools, and other financial services.
PayPal still faces several near-term headwinds, including competition and slower online spending in a post-lockdown market. However, I think it's still a great long-term buy at 33 times forward earnings and seven times next year's sales.
2. Sea Limited
Sea Limited's (SE 0.94%) stock price also tumbled nearly 40% over the past six months as investors worried about the Southeast Asian tech giant's slowing growth, lack of profits, and ambitious expansion plans.
Sea's Shopee is the leading e-commerce marketplace in Southeast Asia and Taiwan, but it's been expanding into Latin America, Europe, and India with aggressive loss-leading strategies. Sea's gaming unit Garena publishes the hit game Free Fire, but the four-year-old game could gradually lose its luster in the crowded mobile gaming market.
The bears believe Shopee's international expansion will flop and that Free Fire, which leverages its profits to partly offset Shopee's losses, will fade away before Shopee's loss-leading strategies lock in enough shoppers.
Those concerns are valid, but Sea is still growing like a weed. Its revenue soared 101% in 2020, and analysts expect 118% growth in 2021 and 50% growth in 2022. Those are jaw-dropping growth rates for a stock that trades at less than seven times next year's sales.
Investors shouldn't underestimate Sea's resilience: Shopee replaced Alibaba's Lazada as Southeast Asia's top e-commerce marketplace in 2019. It surpassed MercadoLibre as the most downloaded e-commerce app in Latin America last year. According to App Annie, Garena's Free Fire, its first self-developed game, was the most downloaded mobile game worldwide in 2019 and 2020. It remains a top game in Southeast Asia and Latin America.
Sea is unprofitable, but it's also sitting on plenty of cash after raising $6.3 billion through a convertible debt and stock offering last September. I believe Sea still has plenty of room to grow over the next few decades, so its recent pullback looks like an attractive buying opportunity.
Should you buy PayPal and Sea today?
PayPal and Sea both got a bit overheated last year, but both stocks now look attractively valued after their latest pullbacks. Investors shouldn't go all-in on either stock right now -- since rising interest rates remain a pressing issue -- but they can gradually accumulate some shares (as I'm doing) before the market realizes it's tossed out the babies with the bathwater again.
