Investors often pay hefty premiums for top growth stocks. So when they go on sale, it can present an incredibly attractive opportunity to load up on them. As long as you're willing to buy and hold, buying cheap growth stocks can lead to significant long-term returns.
Two growth stocks that have been falling sharply over the past six months are Intuitive Surgical (ISRG -0.41%) and Shopify (SHOP 0.14%). And while this recent share-price activity may suggest otherwise, neither of these businesses is in serious trouble today, and buying them could be a decision you thank yourself for years down the road.
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1. Intuitive Surgical
Intuitive Surgical's da Vinci systems could help revolutionize the healthcare industry. The robotic-assisted devices can make surgery more precise and efficient. But robotic-assisted surgery is still in its early growth stages; the industry was worth just $6.1 billion in 2020. However, analysts from Verified Market Research project it will grow at a compounded annual growth rate of 17.6%, and by 2028 it will be worth more than $22 billion.
Unfortunately, growth investors are proving to be less patient of late. Intuitive's stock is down 17% in six months (by comparison, the S&P 500 has fallen a more modest 7% during that time frame). A strong earnings report helped lift the stock from lows it hit in January, but it remains nowhere near its 52-week high of $369. Hoping the stock could get lower than this may be wishful thinking for investors given Intuitive's strong trajectory and potential.
In its fourth-quarter results, the company's revenue of $1.55 billion for the period ended Dec. 31 was up 17% year-over-year. And the number of da Vinci procedures (a key metric for the company) grew 19% from the prior-year period. That's a promising sign that usage is up even with the omicron variant disrupting hospital operations. If COVID-19 cases continue to subside, investors should expect Intuitive's sales and procedure numbers to rise in future quarters, along with shipments of the devices themselves. In Q4, there were 385 shipments of the systems compared to 326 a year earlier, representing an increase of 18%.
Intuitive's forward price-to-earnings (P/E) multiple of close to 60 could spook some investors. But that number could quickly shrink as the business expands its customer base and there's a return to normalcy in the world. The company's profit margins are normally around 30% of revenue -- and as long as that remains intact, its bottom line will soar right along with revenue.
Short-term investors might be missing the boat on Intuitive by focusing on the company's immediate earnings potential. If you're willing to buy and hold, this could make for an incredibly promising stock to own.
2. Shopify
E-commerce stock Shopify has been sinking like a stone. In six months, it has crashed an incredible 64%. At around $560, the stock is now approaching multi-year lows -- the last time it was trading lower than this was April 2020. For investors who missed the market crash of two years ago, now could be an opportunity to have a do-over with Shopify.
The reason for the bearishness is that the company recently warned of a slowdown from pandemic levels, stating only that its sales growth in 2022 won't be as high as the 57% growth it generated in 2021. But that was enough to get the bears going and send the stock to new 52-week lows.
But really, this isn't something that should surprise investors. In 2019, before the pandemic, the company's sales were just under $1.6 billion, and they rose by 47% from the previous year. And that was down from 2018's growth rate of 59%. Shopify's growth numbers were starting to taper off, and it was the pandemic that set its numbers ablaze. During the first year of the pandemic, sales grew by an incredible 86% to $2.9 billion in 2020. This past year, they climbed another 57% on top of that to $4.6 billion.
A slowdown was going to be inevitable for Shopify's business. But that doesn't mean the company's numbers will go back to 2019 levels. And there are still catalysts for Shopify's long-term growth, including a partnership it announced earlier this year with Chinese tech company JD.com, a move that will make it easier for U.S. vendors on Shopify's platform to reach the largest e-commerce market in the world.
Shopify's recent sell-off looks to be well overdone and is a massive overreaction. The business is only going to continue to grow, and unlike 2019, its operations are now profitable. Shopify is coming off the third year in a row where it reported positive free cash flow.
Although the stock's recent decline looks discouraging, the business itself is in fine shape. Like Intuitive, Shopify isn't a cheap buy with a forward P/E of 158, but those numbers can look astronomical when profits aren't all that significant. The positive is that Shopify is moving in the right direction. From a negative operating margin in 2019, the company is now reporting operating profits that are more than 5% of revenue. It's not huge, but those numbers are a sign of progress, and if Shopify can continue to build on that, its share price today might look dirt cheap years from now.
