Amazon's planned 20-for-1 stock split and the Federal Reserve's recently announced quarter-point interest rate hike have been some of the biggest stories in the investing world lately. While the tech giant's stock split is spurring excitement among investors, and the Fed raising rates will have far-reaching effects and impact demand for tech stocks, the fact that some growth stocks are currently trading at very attractive discounts shouldn't be overlooked.
With that in mind, a panel of Motley Fool contributors has profiled three of their favorite, beaten-down growth stocks. Read on to see why they identified Meta Platforms (META -0.52%), Unity Software (U 2.04%), and Netflix (NFLX -3.92%) as companies that could deliver incredible returns for growth-focused investors.
Image source: Getty Images.
Easy to hate, hard to ignore
Jason Hall (Meta Platforms): I'll be the first to admit that I don't own shares of Meta Platforms. I'll also publicly state that I'm unlikely to take my own advice on this and buy shares of the company, because it's a business model that I don't particularly support. I think social media is complex, and I am uncertain that it does more good than harm to society. But my personal reticence shouldn't be a reason for those who don't share my qualms from owning the company.
Because, man, it's so profitable.
Meta earned $39.3 billion in net income in 2021, and almost all of that was free cash flow. It is still one of the biggest and most important advertising platforms on earth. And despite the opinions of people like me who hold the company with a dash of disdain -- hypocrisy alert -- I continue to use Facebook and its other platforms, as do billions of other people who simultaneously complain about it.
The bottom line is, Meta Platforms has never been this cheap, trading for less than 16 times earnings and free cash flow, and almost 10 times operating cash flow.
FB PE Ratio data by YCharts
Should investors just hold their nose and buy shares? That's up to them. But I do think Meta will remain a cash cow, grow more profitable, and outperform the S&P 500 over the next five years. I think shareholders, users, and ad buyers should also continue to hold management's feet to the fire to be better for humanity.
This beaten-down software leader could be explosive
Keith Noonan (Unity Software): Unity Software is a company that provides content-creation tools, and its services are currently used in the creation of more than two-thirds of augmented reality (AR) and virtual reality (VR) content. In addition to leading the content-creation space for AR and VR and benefiting from unfolding metaverse trends, Unity is also already the market leader in development-engine services for the mobile games market.
More than 71% of the market's top-1000 best-performing mobile games rely on Unity's software, and developers of all sizes turn to the company's tools to create their content. For example, even gaming-industry leader Activision Blizzard's hugely successful Call of Duty: Mobile is built on Unity's software engine, and the software specialist has promising avenues to growth as it attracts more customers and sees increased spending from those already using its services.
The company closed out 2021 with a dollar-based net-retention rate of 140%, which means that existing customers on its platform spent an average of 40% compared to the prior-year period. The company's net-expansion rate was actually up from the 138% rate that it posted at the end of 2020, and sales growth for its development-engine services segment actually accelerated despite facing a challenging basis of comparison. Unity ended last year with 1,052 customers contributing $100,000 or more in trailing-12-month revenue, up 33% year over year, and these catalysts helped it grow sales 44% annually to reach $1.1 billion.
I think the market for interactive content is still poised for huge growth over the long term, and I recently purchased Unity stock for my portfolio. With shares down roughly 35% year to date and 56% from their high, this is an industry-leading software specialist that could go on to be a huge winner for long-term investors.
Netflix is spending nearly $20 billion on content while delivering robust profits
Parkev Tatevosian (Netflix): The streaming-content pioneer has fallen out of favor with the market. The stock is down 47% off its high in just a few months. That's created an opportunity for long-term investors to buy this beaten-down growth stock at a lower valuation. And make no mistake, Netflix is still a growth stock.
Much has been made of Netflix's slowing subscriber growth. Investors were always concerned that the surging acquisition and engagement Netflix experienced at the pandemic onset would not last. That is to be expected. No one thinks we will be streaming as much content as during the lockdown periods. Netflix has retained subscriber growth achieved over these last two years and is adding to its totals.
As of Dec. 31. 2021, Netflix boasts 222 million subscribers, up 9% over the same time the year before. The total was enough to generate $7.7 billion in revenue. That's money the streaming leader can use to spend on content to further its leadership position. Indeed, in the 12 months ended Dec. 31, Netflix spent $17 billion on content. All of this will spring the flywheel forward for Netflix. More content brings more subscribers, which brings more revenue that can be spent on more content, and so on.
Moreover, Netflix has reached a big enough scale to deliver robust profits. Net income rose to $5.1 billion in the year ended Dec. 31, up from $2.7 billion in the year prior. Fortunately for investors, Netflix can be purchased at its lowest price-to-earnings (P/E) in the last five years. At 32.86, the P/E is down considerably from the over 120 it was trading for around July 2019.
