Growth stocks have been battered over the last year of trading. While volatility may continue to shake the market in the near term, investors now have a sizable collection of great companies trading at much more attractive prices to choose from.
With that in mind, a panel of Motley Fool contributors has identified three of their favorite beaten-down growth stocks. Read on to see why they think Adobe (ADBE -0.27%), PayPal Holdings (PYPL -1.83%), and PubMatic (PUBM -0.14%) are great buys for long-term investors at current prices.
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Keep it simple with Adobe
Daniel Foelber (Adobe): Thursday's consumer price index report by the U.S. Bureau of Labor Statistics showed that U.S. inflation is now 7.5%. The economy is booming, but the Federal Reserve indicated it's going to begin raising interest rates to combat inflation. Rising interest rates paired with inflation cast a pall on growth stocks that depend on capital markets and are valued on their future earnings.
However, the widespread sell-off in growth stocks has rippled into industry-leading companies, too. Companies like Adobe.
Adobe rakes in a ton of profit and free cash flow and doesn't rely on debt to run its business -- so it's less vulnerable to rising interest rates. What's more, Adobe has recurring revenue thanks to its subscription-based business model. Adobe's cloud-based software suite is an enterprise staple for many businesses -- which gives Adobe pricing power and helps protect its performance during uncertain times.
Adobe's growth has slowed in recent years as its business has matured. But the company is also making more money than ever before.
ADBE Revenue (Annual) data by YCharts
Annual revenue growth of 41% in three years is pretty bad for a growth stock. But Adobe isn't the young unproven company it used to be. Now, it's a cash cow that converts more sales into free cash flow that it can use to reinvest in the business or to seek out bolt-on acquisitions.
In less than three months, share prices of Adobe are down 30% from their all-time high set Nov. 22. And as tempting as it may be to try and catch one of the many falling-knife growth stocks that are down upward of 70%, a safer bet is to simply buy an industry leader like Adobe on sale. It's an investment that will help you sleep at night because you can take solace in the fact that no matter how bad inflation or any other short- to medium-term issue becomes, Adobe is likely to remain a strong business for decades to come.
It's still the go-to digital payment middleman
James Brumley (PayPal): For the record, I completely get why PayPal shares have been beaten to a pulp lately. The rise of cryptocurrency potentially leaves fiat currency middlemen out of the loop, and even to the extent consumers want to stick with government-issued dollars, real competition is creeping in. No wonder PayPal shares have peeled back more than 60% from July's peak, and reached new 52-week lows just this past week.
The thing is, the market seems to be forgetting that PayPal is still not only the king of the mobile wallet space, but is also already wading in cryptocurrency waters. It's not just offering a means of spending your crypto dollars, either. PayPal's platform allows you to buy, sell and just hold your cryptocurrency. Of these two key details though, I think the fact that it's still such a familiar brand people are comfortable with is going to keep driving growth most investors don't seem to see is in the cards.
In this vein, analysts are calling for revenue growth of 16% this year and 20% next year, which should in turn pump up 2021's per-share profit of $4.60 to $5.84 in 2023. There's nothing not to like about that, especially in light of the fact that you can now own this stock for only about 20 times next year's expected earnings.
This small-cap advertising player could be a huge winner
Keith Noonan (PubMatic): PubMatic has seen rocky trading since its pricing peak early last year, and I've been using recent sell-offs as an opportunity to build my position in the stock. The company is now one of the largest holdings in my portfolio, and I plan to keep buying shares and holding for the long term. This is a small-cap company that has the potential to deliver explosive growth.
PubMatic is an advertising-technologies specialist that provides a platform that makes it easier for advertisers and publishers to get the most out of advertising placements. Whether through gathering data or actual placements, digital advertising is a primary monetization method for websites, applications, and streaming content services.
The digital-ads market is still set for big growth over the long term, and there's a promising demand outlook for PubMatic's programmatic advertising services. On the other hand, that hasn't stopped the stock from posting dramatic sell-offs.
With investors becoming increasingly risk-averse and Apple implementing new data-tracking restrictions on its mobile platform, PubMatic's valuation has been under pressure. The stock trades down roughly 62% from its high and has a market capitalization of roughly $1.5 billion. It could have explosive growth potential from here.
PubMatic stock now trades at roughly 35 times this year's expected earnings and 5.4 times this year's expected sales. Revenue increased 54% year over year in the third quarter, and earnings per share surged 140%. The ads specialist also ended the period with $136.7 million in cash and short-term investments against zero debt. For a company with a strong balance sheet that's also profitable and growing at a rapid clip, PubMatic stock looks cheap at current prices.
