Since the Great Recession bottom of March 2009, growth stocks have thrived. Historically low lending rates and a dovish central bank made it easy for fast-paced businesses to access cheap capital in order to hire, innovate, and acquire other companies.
But over the past year, some growth stocks have really hit the skids. The recent bear market dive in the tech-focused Nasdaq Composite, coupled with the Federal Reserve shifting its stance on interest rates, has sent a number of previously high-flying growth stocks screaming lower.
While the velocity of downside moves in the broader market and growth stocks can, at times, be worrisome, these corrections represent the ideal time to put your money to work. Below are three growth stocks down anywhere from 79% to 94% over the past 14 to 18 months that have the competitive advantages and intangibles needed to double by 2025.
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Teladoc Health: 79% below its February 2021 all-time high
First up is telehealth kingpin Teladoc Health (TDOC -1.52%), which has fallen from an intra-day high of $308 in February 2021 to the $66.06 per share it closed at this past week.
Skeptics have had two big issues with Teladoc. To begin with, the company's acquisition of applied health signals company Livongo Health was, in hindsight, grossly overpriced, and one-time costs associated with the transaction widened the company's losses in 2020 and 2021. The other concern is that Teladoc is being viewed as a one-hit wonder that was simply in the right place when the COVID-19 pandemic struck. Skeptics are counting on growth rates to slow way down when the pandemic is officially over.
The problem with both of these objections is that they're extremely short-sighted. For example, sales and virtual visit-growth data pretty clearly show that Teladoc's services are more than a pandemic fad. The company enjoyed average annual sales growth of 74% in the six years leading up to the pandemic. Meanwhile, virtual visits are expected to grow from a reported 2.64 million in 2018 to an estimated 18.5 million to 20 million in 2022. While the pandemic has increased the use of telemedicine, demand for virtual visits would have risen substantially with or without the pandemic.
What investors need to understand is that telemedicine is providing tangible benefits up and down the treatment chain. Virtual visits are often far more convenient for patients, and can allow physicians to keep closer tabs on their chronically ill patients. Ultimately, the ease-of-access offered by telehealth services can improve patient outcomes and reduce out-of-pocket costs to insurance companies.
As for the Livongo purchase, a mountain of stock-based compensation that weighed on Teladoc's bottom line is now in the rearview mirror. Looking forward, the duo can now focus on cross-selling opportunities and reaching chronic-care patients that would benefit from Livongo's services.
With the company offering a sustainable annual growth rate of 20% or higher, and losses expected to shrink in subsequent years, Teladoc has a clear path to double in value over the next three years.
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Bark: 82% below its December 2020 all-time high
A second beaten-down growth with all the tools needed to double in value by 2025 is dog-focused products and services company Bark (BARK 0.94%). Since hitting a record intra-day high of $19.54 in December 2020, shares have retraced 82%.
The biggest knock against Bark is that the company came to market via a special purpose acquisition company (SPAC). Pretty much anything having to do with SPACs has been taken to the woodshed over the past couple of quarters. Bark is also losing money at a time when the broader market is correcting lower and investors are becoming more critical of traditional fundamental metrics.
But there are three key reasons Bark has the potential to double investors' money in three years, if not sooner. To start with, the pet industry is about as recession-resistant as they come. Last year, an estimated $109.6 billion was spent in the U.S. on companion animals, according to the American Pet Products Association. It's been more than a quarter of a century since year-over-year spending on companion animals declined in the U.S.
Second, Bark's operating model is predominantly based on subscriptions. Although it has a presence in well over 20,000 retail doors, including Walmart, only 16% of fiscal third-quarter sales (ended Dec. 31, 2021) derived from retail stores. The remaining 84% of sales came from its 2.3 million (and growing) direct-to-consumer subscribers. An online-based operating model like Bark enjoys lower overhead costs and higher gross margin than traditional retailers.
Third, Bark's innovation has the ability to bring in new subscribers and drive add-on sales and average order value higher. For instance, the Bark Eats service works with owners to personalize a dry food diet for their dog. Meanwhile, Bark Home gives owners a resource to buy in-demand accessories, such as beds, leashes, and collars. Not surprisingly, add-on sales are up 84% in the first nine months of fiscal 2022, relative to the same period of fiscal 2021.
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Root: 94% below its October 2020 all-time high
The third fast-paced company that's been absolutely pulverized but appears due for a big bounce is technology-based auto insurance company Root (ROOT 0.02%). Shares of Root have nosedived from north of $28 after its debut in October 2020 to below $2, as of last weekend.
The core issue with Root, and the reason its stock has been pummeled for 18 straight months, is its large annual losses. Although the auto insurance industry is boring, it tends to be highly profitable. This means Root's large quarterly and annual losses have stood out like a sore thumb.
However, Root deserves some slack for attempting to disrupt this stodgy industry with a tech-driven pricing method that could become wildly profitable.
For decades, auto insurance policies have been priced using metrics that have absolutely nothing to do with the safety of the driver behind the wheel. For instance, factors like credit score and marital status are commonly used to price auto policies. Root, on the other hand, is leaning on telematics as its secret weapon. It's relying on highly sensitive instrumentation found in smartphones to measure G-forces during acceleration, braking, and turning, to determine how safe an individual really is behind the wheel. Utilizing this personal data can allow Root to offer fairly and accurately priced policies to drivers.
Despite losing money and facing inflationary pressures over the past couple of quarters, Root's quarterly results have shown flashes of brilliance. In particular, the company's gross accident period loss ratios for 2020 and 2021 were well below 100%. A figure below 100% indicates that insurance policies were profitably written.
What's more, Root forged a partnership with online car-buying platform Carvana this past August. This partnership allows buyers on Carvana's platform to quickly and conveniently purchase a Root-backed insurance policy. Best of all, since Root knows the exact details of the car being insured, it further assists with accurate policy pricing.
Although Root remains a work in progress, it has all the tools and intangibles necessary to double investors' money by 2025.
