This year probably hasn't gone as many investors envisioned it would. Both the broad-based S&P 500 and nearly 126-year-old Dow Jones Industrial Average hit correction territory in March (i.e., a decline of at least 10% from recent highs), while the growth-focused Nasdaq Composite briefly fell into a bear market.
Although stock market declines are unpredictable, and the velocity of moves lower can be unnerving, big drops in the broader market are, historically, a great time to buy high-quality companies at a discount. After all, every notable drop in the major indexes has eventually been cleared away by a bull market rally.
With all the major U.S. indexes retracing, the following five growth stocks have started rocketing up my prospective buy list. Sooner or later, they may find a place in my portfolio.
Image source: Getty Images.
Upstart Holdings
The first fast-paced company that has my full attention following a greater than 80% pullback from its all-time high is cloud-based lending platform Upstart Holdings (UPST +2.94%).
The big worry Wall Street seems to have with Upstart is the possibility that rapidly rising interest rates will crush loan demand. That would slow the company's growth rate, which is predominantly reliant on personal loans. However, my contention is that Upstart's artificial intelligence (AI)-driven platform gives it a leg up on processing loan applications and could make it an even more popular choice by banks and credit unions as rates rise and loan demand tapers a bit.
NASDAQ: UPST
Key Data Points
The interesting aspect of Upstart's AI-powered lending platform is that it's broadened the loan-approval spectrum. In other words, people who wouldn't have qualified via traditional vetting processes are now getting approved -- and it's not resulting in higher delinquency rates. Upstart is democratizing the lending process and saving financial institutions money in the process.
What's more, Upstart acquired Prodigy Software last year, which allows it to push into the considerably larger auto loan-origination market. With no credit exposure and a long runway of double-digit growth potential, Upstart is quickly rising in the ranks.
Image source: Getty Images.
Palantir Technologies
Another high-growth tech stock that's raising an eyebrow as it retraces from its early 2021 all-time high is data-mining company Palantir Technologies (PLTR +3.40%).
If I had to pinpoint a single reason for Palantir's more than 70% tumble from its record intraday high, it would be the company's valuation. At its peak, Palantir was approaching about 100 times sales, which is an extremely rich figure, even in a bull market. The good news is this price-to-sales multiple has come down big time -- Palantir trades at just under 10 times Wall Street's forecast sales for 2023.
What makes Palantir so intriguing is that there's no other company quite like it. Palantir's Gotham platform provides data-mining services for government entities worldwide (predominantly the U.S.), while the Foundry platform helps interpret mountains of data for businesses to help them streamline their operations.
For the moment, Gotham is the key growth driver. A number of large contract wins are helping to sustain annual sales growth of 30% (or more). But the ceiling for Gotham is limited (i.e., Palantir won't allow certain countries, such as China, to use its data-driven software). Over the long run, Foundry is Palantir's golden ticket to success, with the company just scratching the surface with regard to its enterprise potential.
Nio ET7 deliveries began in late March. Image source: Nio.
Nio
A third growth stock that's quickly climbed up my prospective buy list is China-based electric-vehicle (EV) manufacturer Nio (NIO 0.39%).
Nio has been hit by a triple whammy. First, skeptics have been concerned with its valuation, which at one time was above 30 times sales. Second, there's the worry that it and other China-based stocks could be delisted for not complying with certain U.S. accounting disclosures. And third, a semiconductor chip shortage, along with COVID-19 lockdowns in various Chinese provinces, has disrupted Nio's production.
NYSE: NIO
Key Data Points
While every one of these concerns is tangible, none of them should impact Nio's long-term growth trajectory. For example, even with supply-chain headwinds, the company grew deliveries from less than 4,000 EVs in the first quarter (Q1) of 2020 to more than 25,000 EVs in Q1 2022.
Furthermore, innovation should have no trouble pushing Nio's valuation significantly higher over time. Two of its newly introduced EVs, the ET7 and ET5 sedans, offer superior range to Tesla's flagship sedans, with a battery upgrade. Also, the company's battery-as-a-service subscription should lead to sustainable high-margin revenue and keep early buyers loyal to the Nio brand.
Image source: Getty Images.
Redfin
Although it's in one of the least-liked industries at the moment, tech-focused real estate company Redfin (RDFN +0.00%) is another growth stock climbing up my potential buy list.
Shares of Redfin have collapsed more than 85% over the past 14 months. This gigantic pullback has to do with rapidly rising inflation and the expectation that the Federal Reserve will get aggressive with interest-rate hikes over the coming year or two. The 30-year mortgage rate has already hit its highest level in more than a decade, which is expected to slow home sales.
Again, we're looking at a tangible headwind, but not one that I believe is going to be an operating-model breaker for Redfin. The secret sauce with this company is both the cost savings it can offer and its personalization.
In terms of the former, Redfin charges either a 1% or 1.5% fee, depending upon how much business a buyer or seller has previously done with Redfin. That compares to traditional real estate companies that charge up to a 3% agent/listing fee. This up-to-2% difference represents thousands of dollars in average savings per deal.
As for personalization, Redfin offers a number of services to help buyers and sellers succeed. For instance, RedfinNow is an iBuying service that pays cash for homes in select markets and removes the hassle and haggling associated with selling a home. As for buyers, the company pivoted to online and 3D virtual tours during the pandemic.
With Redfin's share of U.S. existing home sales continuing to climb (1.15% market share, as of the fourth quarter of 2021), I'd expect its stock to eventually follow suit.
Image source: Getty Images.
Salesforce
The fifth and final growth stock rocketing up my prospective buy list is cloud-based customer relationship-management (CRM) software-solutions provider Salesforce.com (CRM +4.72%). Shares of the company are down 44% over the past five months.
For those of you wondering, CRM software is used by consumer-facing businesses to enhance existing customer relationships in order to boost sales. CRM software can run predictive sales analyses to see which customers might be most inclined to purchase a new product or service or be used to oversee online marketing campaigns or product/service issues until they're resolved.
NYSE: CRM
Key Data Points
The thing investors should love about Salesforce is its undeniable lead role in the CRM software space. According to a report by IDC, Salesforce brought in 23.9% of global CRM spend in the first-half of 2021. That compared to less than 20% market share on a combined basis for No. 2 through No. 5. Put simply, we're not going to see Salesforce dethroned anytime soon.
Shareholders should also appreciate CEO Marc Benioff's strategic moves to grow the company. Benioff has a penchant for making earnings-accretive acquisitions. Some of the better-known acquisitions include buying MuleSoft, Tableau Software, and Slack Technologies -- the latter of which closed last year. This combination of internal innovation and acquisition-driven ecosystem expansion should allow Salesforce to potentially double its annual sales over the next four years.
