Since the end of the Great Recession 13 years ago, growth stocks have led the broader market higher. A combination of historically low lending rates and a generally dovish Federal Reserve has allowed fast-paced companies access to cheap capital, which they've used to hire, acquire, and innovate.
However, growth stocks have taken it on the chin since the beginning of the year. All three major U.S. stock indexes have entered correction territory, with the tech-focused Nasdaq Composite pushing into a bear market. Although big declines in the market can be scary, they're the opportune time for bargain-hunting investors to go shopping.
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Following the latest big pullback, two growth stocks stand out as incredible bargains that can be bought hand over fist. Meanwhile, another reasonably inexpensive growth stock is one for investors to avoid like the plague.
Bargain growth stock No. 1 to buy: Upstart Holdings
The first growth stock that's a screaming bargain for opportunistic investors is cloud-based lending platform Upstart Holdings (UPST 0.96%).
Shares of the company have gone on a wild ride since last summer. Since October, Upstart is down by more than 80%. Historically high inflation has coerced the nation's central bank to get aggressive with interest rates, which in turn has Wall Street concerned about a loan origination slowdown. While these fears are tangible, they overlook Upstart's clear-cut competitive advantage.
What makes this company so special is its artificial intelligence (AI)-driven lending platform. Instead of relying on traditional loan-vetting metrics, Upstart is allowing AI to play a key role in approving or denying applications for financial institutions. The end result is that folks with lower credit scores, who'd likely not be approved during a traditional loan-vetting process, are being approved by Upstart. Despite lower average credit scores, the loan delinquency rate with Upstart's AI-powered platform is consistent with the traditional vetting process.
Aside from democratizing the lending process, Upstart is also saving financial institutions quite a bit of money. Approximately 70% of loans are approved instantly and are fully automated. Given the success of this AI lending platform, a higher interest rate environment makes it even likelier that banks will turn to Upstart as total loan applications retrace to historic norms.
Additionally, Upstart has made the move into AI-driven auto lending (that pun was entirely on purpose). Acquiring Prodigy Software last year allowed it to enter the auto loan origination market, which is more than seven times larger the personal loan origination market that it's been focused on for years.
Upstart is valued at just 22 times Wall Street's 2023 consensus earnings forecast. That's outlandishly cheap for a company expected to deliver 65% revenue growth this year and 37% sales growth in 2023.
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Bargain growth stock No. 2 to buy: Meta Platforms
The second bargain growth stock that can be bought hand over fist by investors is Meta Platforms (META 0.14%), the company previously known as Facebook.
Meta is dealing with three issues at the moment. To begin with, CEO Mark Zuckerberg is spending aggressively on metaverse innovations, which is weighing on the company's bottom line. Second, Apple's iOS privacy changes have modestly hurt Meta's ability to track user data, which is a blow for a company that generates most of its revenue from advertising. And third, global supply chain concerns and high inflation have stymied merchants' willingness to pay a premium for ads. Taking into account the growing popularity of Reels, which are less profitable for Facebook, the average price per ad declined by 8% in the first quarter.
In spite of these headwinds, Meta offers identifiable advantages that makes it a smart growth stock to buy for patient investors. For instance, Facebook had 2.94 billion monthly active users (MAUs) in the first quarter, with WhatsApp and Instagram adding an additional 700 million unique MAUs. Combined, that's 3.64 billion people, or more than half the world's adult population, visiting a Meta-owned social media asset monthly. Advertisers are fully aware that no other social site offers up more eyeballs than Meta's family of apps.
To add to the above, Instagram, Facebook, and WhatsApp were respectively the second, third, and fourth most-download apps worldwide last year. Meta may not be growing at a lightning-quick pace anymore, but this data suggests it's doing just fine in the social media realm.
Something else to consider is that, despite Meta's massive metaverse investments (say that three times fast), the company has the balance sheet and operating cash flow to support taking chances. Meta generated close to $14.1 billion in net cash from its operating activities in the first quarter, and it ended with almost $44 billion in cash, cash equivalents, and marketable securities. Even if it takes years for the metaverse to mature, its multitrillion dollar potential makes this a worthwhile investment.
Bargain hunters have the opportunity to buy shares of Meta right now for less than 14 times Wall Street's forward-year earnings forecast. For context, Meta has averaged a forward-year earnings multiple of 25 over the past five years.
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The bargain growth stock to avoid: Coinbase Global
On the other end of the spectrum is a fast-growing and reasonably inexpensive growth stock that I'd suggest investors avoid like the plague: cryptocurrency exchange and ecosystem Coinbase Global (COIN 7.04%).
Coinbase, which went public via initial public offering last year, had a stellar 2021 -- at least from an operating perspective. The leading crypto exchange ended the year with 11.4 million monthly transacting users, had $278 billion in assets on the platform, and saw its net income jump more than 11-fold to $3.62 billion. On a trailing 12-month basis, Coinbase is valued at less than 8 times its earnings per share.
However, this growth story could have an unhappy ending.
One of the biggest issues with Coinbase is its reliance on trading revenue from Bitcoin and Ethereum. These crypto blue chips, which make up about 60% of the aggregate digital currency market cap, accounted for 45% of trading volume last year. Unfortunately, Bitcoin and Ethereum, along with the crypto market in general, have been unable to decouple from the stock market and create their own identities. As a result, cryptocurrencies have been pulling back right alongside the equity markets.
History has also shown that trading volume dries up quickly when the cryptocurrency market isn't registering jaw-dropping gains. Following Bitcoin's 80% decline in 2018, Coinbase's revenue fell by close to 50%.
Another concern is that there's very little moat in the crypto exchange arena. While Coinbase is the most well-known crypto exchange, it wouldn't be all that difficult for competing platforms to undercut its transaction fees. The multidecade commission war between traditional equity brokers eventually weighed on margins and coerced those brokers to eventually drop their trading fees altogether. My expectations is that we'll see similar margin pressure affect Coinbase moving forward.
With so much about crypto regulation in the U.S. still unanswered, Coinbase Global is a relatively cheap growth stock that can be easily avoided.
