Growth stocks have been shrinking in 2022. The tech-heavy Nasdaq Composite (^IXIC) index is down 11% year to date, and many former market darlings have taken even sharper corrections right on the chin.
The reasons for this marketwide correction are serious and abundant. Geopolitical conflicts are ongoing, the coronavirus pandemic is still raging, the American economy is generating inflation of historic proportions, the supply chains for wares from semiconductors to cream cheese are in shambles -- and I'm only scratching the surface with this list.
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The market is full of generous discounts these days. At the same time, some companies that took huge haircuts over the last few months are fantastic businesses with bright prospects -- even in this challenging economy. It's easy to find spectacular buys in times like these.
In particular, these two tickers stand out as great buys.
Netflix doesn't belong in the bargain bin
Shares of media-streaming veteran Netflix (NFLX -3.92%) have fallen 36% year to date. Investors are nervous about a dramatic slowdown in subscriber additions, based on management's modest guidance for the first quarter of 2022. It didn't help that the conservative projections showed up amid a general market retreat from growth stocks with lofty valuations.
The bearish crowd is also ignoring a plethora of signs that the slowdown will be temporary and the growth story has lots of episodes left:
- Netflix expects to add 2.5 million net new subscribers in the first quarter. That's still a significant increase, even in an historically slow period.
- If the company wanted to maximize subscriber growth at all costs, it could lower the monthly fees dramatically and watch the sign-ups roll in. Instead, Netflix balances customer counts against revenue growth and profitability. The company generates positive subscriber growth while also raising prices on a market-by-market basis. Average revenue per subscriber increased by 7.6% in 2021. That rate should double to 15% in the first quarter as price changes in North America take effect. All in all, first-quarter revenues are projected to increase by 24.4% year over year.
- Streaming media is taking the baton from broadcast, cable, and satellite TV operators at a frantic rate both domestically and worldwide. But streamers, including market-leader Netflix, still have a long way to go before the handoff is complete. Netflix commands less than 10% of the average U.S. consumer's daily time spent in front of a media screen, and old-school linear TV is still the front runner in this crucial metric.
So the long-term growth thesis looks as solid as ever. At the same time, Netflix shares are trading at their most inviting valuation multiple in years. You can pick up Netflix stock for just 5.3 times trailing sales and 34 times trailing earnings. These ratios held steady at more than 80 times earnings and nine times sales in recent years.
Netflix is a great company but the stock is ridiculously undervalued. It's the strongest buy on my list today.
An e-commerce titan in the making
E-commerce platform provider Shopify (SHOP -2.37%) has seen share prices plunge 46% lower in 2022. Don't cry for longtime shareholders, though -- Shopify has still gained 968% in five years.
Those massive returns weren't pulled out of thin air and speculation. Shopify's comprehensive portfolio of web-based retail solutions accounted for 10.3% of the e-commerce market in 2021, up from 5.9% just two years earlier. The company is winning market share by the boatload while the online retail sector is experiencing explosive growth.
At the same time, Shopify is adding new products and services to its offerings, including payment services, merchant loans, and point-of-sale systems. The company is also eyeing an international expansion plan. Customers outside North America accounted for just 29% of Shopify's total revenues last year, up from 27% in 2020.
Shopify may not look tremendously cheap, trading at 17 times trailing sales and 170 times free cash flows, but you get what you pay for. Annual sales have tripled in two years. Free cash flow soared from breakeven to $454 million over the same period. Like Netflix, Shopify is exploring a great big world of untapped business opportunities, and the stock is a no-brainer buy while the discount lasts.
