Nasdaq Bear Market: 3 Beaten-Down Growth Stocks You'll Regret Not Buying on the Dip

Tech investors have been experiencing an ugly sell-off this year. The tech-heavy Nasdaq Composite Index, now down more than 20% from its peak, is officially in bear market territory, while the Ark Innovation ETF, which invests in many prominent growth tech stocks, has lost about 60% of its value.

Nonetheless, the business cases for many of the sector's growth names remain intact. Recognizing that, investors may want to consider picking up shares of companies such as PagerDuty (PD -2.70%), Nvidia (NVDA 3.71%), and PayPal (PYPL -1.14%) while they are sitting in the bargain bin.

Image source: Getty Images.

PagerDuty: Powering software development productivity

Brian Withers (PagerDuty): Although most people don't use pagers anymore, PagerDuty got its start in 2009 to replace the dreaded "duty" for a software engineer to respond to the on-call pager.

When a software issue arises for one of its clients, PagerDuty's flagship platform ensures that the right members of that client's team get called upon to fix it, and makes sure that they have the information they need to do so. It has built a $300 million-plus annual revenue run rate business by providing software development productivity tools for incident management, AI-assisted event monitoring, and maintenance automation.

In mid-March, it reported results for the fourth quarter of its fiscal 2022, which ended Jan. 31. PagerDuty's top line grew at a 32% year-over-year clip on the back of its land-and-expand business model. Dollar-based net revenue retention was in the 120%-plus range, and the number of large customers spending more than $100,000 annually with the company is growing at a torrid pace. It even has 43 customers that spend in excess of $1 million with it annually.

The company is losing money on the bottom line as it's investing heavily in its growth. But its war chest of $543 million in cash and investments gives it the flexibility to operate with a negative operating margin for years as it builds out its business.

Source: PagerDuty earnings presentations. ARR = annual recurring revenue. pp = percentage points. PagerDuty's fiscal 2022 ended on Jan. 31, 2022.

Although PagerDuty trades on the NYSE, its shares have been sold off in sync with the Nasdaq's tech stocks recently. The stock is down 35% from the high it touched in September, and would likely be even further down had it not been for the market's positive response to its most recent earnings report.

But savvy investors know this is a long game. This fast-growing software-as-a-service company is now trading at a more reasonable price-to-sales ratio of 9, which presents an opportunity for patient investors. With a 34% compound annual revenue growth rate over the last three years and a $36 billion market opportunity, this gem of a company is just getting started.

Image source: Getty Images.

Nvidia: Surging sales and profit growth at a discount

Danny Vena (Nvidia): While corrections and bear markets are painful when they're in progress, the best thing about them is that when they occur, traders tend to throw the baby out with the bathwater, as it were. Best-in-class stocks take a beating along with their lower quality peers. That gives investors the opportunity to pick up top-notch growth stocks at discount prices. Such is the case with Nvidia.

The specialist in graphics processing units (GPUs) has been a consistently strong performer for years, and its growth has recently accelerated. Over the past five years, Nvidia's revenue has grown at a compound annual rate of 31%, yet in the fourth quarter of its fiscal 2022 (which ended Jan. 30), its revenue grew by 61% year over year.

What drove Nvidia's growth in recent years was its pivot to cloud computing and data center processors. Further cementing its prospects are the semiconductor and software stacks the company develops for its customers, providing all-in-one solutions for their most complicated and challenging issues, including artificial intelligence (AI) applications. This fueled growth in its data center segment, which grew by 58% in its fiscal 2022. This is not your grandfather's chip company.

At the same time, Nvidia hasn't lost sight of its largest revenue driver, and was actually able to increase its footprint in the discrete desktop GPU market, where it holds an unrivaled 83% share. Its GPUs are the gold standard for serious and casual gamers alike. This helped drive its gaming revenue up 61% last year.

The company's fiscal fourth-quarter results help illustrate the magnitude of its dominance. Nvidia generated record-breaking quarterly revenue of $7.64 billion, up 53% year over year. Record-setting performances by its gaming, data center, and professional visualization segments fueled that top-line result. Even more impressive was the bottom line. Net income more than doubled, driving earnings per share up 103%. 

Nvidia isn't resting on its laurels and has no intention of ceding its edge to rivals. The company spent roughly 24% of its revenue on research and development in its fiscal 2022. Its constant innovation is fueling the development of the next generation of its state-of-the-art processors.

Yet even for all its successes, Nvidia has just scratched the surface of its large and growing opportunity. The company generated record revenue of $26.9 billion in its fiscal 2022, which still pales in comparison to its total addressable market, which management estimates will hit $250 billion by 2023. 

Amid the recent Nasdaq bear market, Nvidia stock has been dragged down by more than 40%. Given the company's industry-leading position, the secular tailwinds driving gaming, cloud computing, AI, and data center adoption, and its large and growing addressable market, investors who miss out on buying the semiconductor stock at this discount will regret it later.

Image source: Getty Images.

PayPal: Consider the sale price on this payments leader 

Will Healy (PayPal): (PYPL -1.14%) PayPal pioneered the fintech business by facilitating online payments, and it took those capabilities to nearly every country in the world. And while digital payments still account for the majority of its transaction volume, it continues to expand its offerings.

Among its offerings is the Venmo social payments platform. This peer-to-peer platform claimed more than 83 million users as of the end of last year, and its Q1 payment volume grew to $58 billion, a 12% increase year over year. PayPal has also added functions such as buy now, pay later (BNPL), Honey for couponing, Zettle for point-of-sale, and PayPal Ventures for fintech and blockchain investing.

But despite its numerous offerings, many traders soured on the stock after its Q4 earnings report. Management indicated that it wanted to shift PayPal's focus from adding customers to better monetizing the current customer base. Soon after, its move to shutter its operations in Russia placed further pressure on its growth.

Consequently, net revenue in Q1 2022 grew by only 7% year over year to $6.5 billion. That was a dramatic slowdown from its 17% revenue growth rate during 2021.

Non-GAAP earnings in Q1 fell to just over $1 billion, 29% less than in the prior-year period. Rising transaction expenses and increased transaction and credit losses weighed on earnings. Additionally, a one-time income tax benefit of $225 million in Q1 2021 boosted income in that quarter. For comparison, PayPal paid $120 million in income tax in Q1 2022.

But despite worries about the size of the customer base, net new additions of 2.4 million grew its total active accounts by 9% year over year to 429 million. And in Q1, total payment volume rose 13% to $323 billion. Additionally, management forecasts a growth recovery, guiding for an 11% to 13% increase in net revenue for 2022. Analysts, meanwhile, forecast 17% revenue growth in 2023, which would match PayPal's 2021 growth rate.

Finally, its current valuation could further help PayPal. The stock now trades at a discount of more than 70% from its 52-week high, and its price-to-earnings ratio has fallen from 75 last summer to just 31. Compare that to fintech peer Block (formerly known as Square), which trades at a price-to-earnings ratio of around 340. PayPal is a world-leading fintech, and given its bargain valuation and its extensive footprint, investors should not overlook this opportunity to buy in.