Rising interest rates have historically meant tough times for growth stocks. With the Federal Reserve having already raised rates once in 2022 and signaling six more significant hikes before the year is out, companies that trade at growth-dependent valuations have been under pressure. Making matters even worse, geopolitical pressures and worrying earnings performance from some high-profile industry leaders have also squashed investor confidence.
These days, you don't have to look too hard to find tech stocks trading down more than 70% from recent highs. Some of these companies will wind up delivering huge wins for long-term investors, but investors should still be smart about which ones they put their money behind. With that in mind, a panel of Motley Fool contributors has identified top picks from the crowd of beaten-down growth stocks.
This e-commerce disruptor trades for 2017-level valuations
Jason Hall: We are in the age of e-commerce. It almost doesn't matter what business you're in today; if you sell goods or services to customers, you need a website that can facilitate every part of the customer engagement. And if your business also relies on brick-and-mortar stores, having the right technology partner to help manage and integrate everything is incredibly important.
Shopify (SHOP -1.16%) has emerged as, by far, the leader in providing merchants with solutions to the challenges of commerce, both in-person and online. Since its founding in 2006, it has steadily added more and more tools, including payments, marketing, integration with other e-commerce channels, shipping, and fulfillment.
This has supercharged its growth. Shopify's revenue grew 57% in 2021, continuing the momentum it got from 2020, when so many companies raced to build out their online capabilities. For context, last year's 57% revenue growth was stronger than the 47% growth in 2019. Despite the market's worries, this is no pandemic stock.
One more data point to demonstrate how powerful Shopify's business is: Its market share increased from 8.6% in 2020 to 10.3% in 2021. Only Amazon took more share -- from 39% to 41% -- and none of the top 10 increased their share by as large a percent.
Yet Mr. Market's massive tech sell-off -- along with worries about Shopify's plans to expand into the lower-return, higher-capital fulfillment business to support its merchants, has led investors to sell Shopify stock down 75% from the highs. Today's price is likely to make this a huge winner for investors over the next decade.
This social media stock has a massive market opportunity
Parkev Tatevosian: My top beaten-down growth stock to buy now is Pinterest (PINS 1.02%). The image-based social media site thrived at the pandemic's onset, adding millions of users and experiencing a surge in engagement from existing customers. The economic reopening has reversed that trend, and Pinterest lost some of that momentum it gained in the beginning stages of the outbreak. As a result, the stock got hammered and is down 78% off its high.
That's created an opportunity for long-term investors to buy the stock at its lowest valuations. Pinterest is trading at a price-to-free cash flow ratio of 17.55 and a price-to-earnings ratio of 42. Those are bargain valuations for a business with the growth prospects of Pinterest.
The company boasts 433 million monthly active users, up by 2 million from the previous quarter. The platform is free to join, and it makes money only by showing advertisements to users browsing the platform. And judging by Pinterest's revenue growth of 60%, 51%, 48%, and 52% in the previous four years, marketers must be getting a good return on their spending because they keep coming back for more.
Moreover, Pinterest has plenty of room to keep growing. It earned $2.6 billion in revenue in 2021. To put that figure into context, advertisers spent $763 billion globally in the same year. So despite its rapid growth, Pinterest is still capturing a small piece of the pie. Of course, Pinterest faces headwinds in the near term with economies reopening and supply chain shortages dampening advertiser demand. However, a cheap valuation, proven growth, and a massive total addressable market make Pinterest stock an excellent buy.
This streaming player can post explosive returns
Keith Noonan: Between high levels of inflation, looming interest rate hikes, and a litany of other potential bearish catalysts, there are a ton of risk factors for investors to consider right now. When these kinds of dynamics are at play, it's not unusual to see investors "re-rate" entire industries and even the market at large. Making matters worse for Roku (ROKU -3.29%), the streaming hardware and digital advertising company is facing difficult growth comparisons as it laps periods of highly elevated pandemic performance.
While Roku is a category leader in set-top box and smart-television streaming hardware, it's the opportunities that these strong hardware positions have created in digital advertising that are even more central to the company's long-term earnings growth potential. The fact that it's not currently posting profits might be a sticking point for investors in the current market climate, but this business looks primed to serve up stellar performance over the long term. The streaming leader closed out the period with 61.3 million active accounts, up 14% year over year, and average revenue per user (ARPU) soared 34% year over year to reach $42.91.
With a market capitalization of roughly $11.5 billion and the company valued at approximately 3.1 times this year's expected sales, Roku trades down 80% from its high and hardly looks unreasonably valued even if it isn't currently posting profits. The streaming innovator has pursued a land-and-expand approach to growth, and the approach of building a large user base and then working to improve monetization will likely prove very rewarding over the long term.
In a recent interview, Evercore analyst Shweta Khajuria said that the firm sees the potential for Roku to increase its ARPU more than three times from current levels. The streaming company is still adding users at an encouraging rate, and it should be able to score big wins as advertising continues to move away from legacy TV distribution and toward streaming.