Investing in growth stocks is a bit of a contrarian position these days. Investors are taking an overly conservative stance and shedding growth stocks as if they're about to go under. It's a far cry from last year, when you could pick a random ticker and make a good return amid the meme hype.
Stocks weren't worth the ridiculous premiums they were trading at a year ago; nor are they suddenly worthless now. The truth usually lies somewhere in the middle. For investors, that means sell-offs happening now could be creating some attractive buying opportunities.
Three of the best growth stocks to buy in May include Intuitive Surgical (ISRG -0.41%), Netflix (NFLX -0.51%), and PayPal Holdings (PYPL -1.83%). They're all down more than 30% this year, but here's why they could all be profitable investments for your portfolio.
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1. Intuitive Surgical
A 15% growth rate admittedly isn't going to get investors too excited about a business. That's how much Intuitive Surgical's sales rose by during the first three months of 2022, when sales came in at just under $1.5 billion. That, combined with a price-to-earnings (P/E) multiple of over 50, make it easy to see why investors may have been dumping the stock of late.
But Intuitive Surgical is in the robotic-assisted surgery market, which is still in its early growth stages. Even though the industry will be worth more than $22 billion by 2028 (that's more than three times its value in 2020) according to estimates from Verified Market Research, that's still fairly small -- healthcare giant Johnson & Johnson reported more revenue in just its latest quarter.
It's a long road ahead for Intuitive Surgical, and solely looking at one period or an earnings multiple can paint a misleading picture of the stock. And it doesn't help that COVID-19 has disrupted hospital operations and the number of procedures utilizing the company's da Vinci systems.
However, there are encouraging signs ahead. Management stated on its recent earnings call that it forecasts procedure growth this year to be between 12% and 16%, up from an earlier forecast of 11% to 15%. It's a modest change but a step in the right direction nonetheless.
Intuitive Surgical makes for a promising investment -- both long term and as the economy returns to normal this year.
2. Netflix
Streaming giant Netflix could also be an exciting growth investment to pick up today. Its shares are trading at 2017 prices even though the business is much bigger and more profitable than it was five years ago. Twice this year, the stock has fallen by at least 20% after releasing earnings because of either slowing growth (in January) or an outright loss of subscribers (April).
But while the headlines screaming that Netflix is losing subscribers are concerning, that shouldn't be enough of a reason to give up on the business. The company recently raised its prices, which will help drive up sales. Plus, it is cracking down on password sharing, which it estimates involves 100 million households that are not paying for its service -- that's steep, given that it reported 222 million subscribers as of the end of March. Getting some of those households to sign up (potentially through lower-priced and ad-based plans, which Netflix is looking into offering) could boost its subscriber numbers in an instant.
Overall, Netflix's business isn't in horrible shape by any stretch (certainly not enough to justify such a steep sell-off this year), as its operating income of $1.97 billion for the first three months of 2022 was slightly up from the $1.96 billion it reported a year earlier. The steep drop in price has put its valuation at a P/E multiple of less than 18, which is dirt cheap when you consider before the pandemic it wasn't uncommon to see it trade at more than 100 times earnings.
3. PayPal
Fintech company PayPal has lost more than half of its value this year. Net sales totaling $6.5 billion in the company's most recent period (first three months of the year) were only up 7% year over year. That, along with a troubling outlook for an economy that could be facing a recession this year, have made investors wary about loading up on stocks like PayPal that depend on consumer spending to be strong in order to perform well.
But investors also need to remember that PayPal's business looks different now that online marketplace eBay has shifted onto its own managed payment system and is no longer using PayPal's services. When excluding eBay from prior-year comparables, PayPal's revenue rose at a much higher rate of 15% last quarter.
PayPal's stock today trades back at where it was in March 2020, before the boost its business received from the pandemic and a surge in online shopping. And while it's true that softer numbers could be ahead in the near term if there's a recession, e-commerce over the long haul is going nowhere but up. According to estimates from Research and Markets, the global digital payment market will grow at a compound annual rate of 20.5% from now until 2030, when it will be worth more than $361 billion. And you can bet PayPal will be a big benefactor of all that growth.
At a P/E of 25, PayPal looks like a bargain buy, as prior to this year, its shares routinely traded at multiples of 50 times earnings and higher.
