After a stunning rally from the March 2020 pandemic low point, which saw the technology-centric Nasdaq-100 index more than double, it has since seen a partial reversal and is now officially in bear market territory.
Bear markets are generally defined by a prolonged decline in an index (or a trading sector) of at least 20% from recent highs. The Nasdaq-100 has comfortably surpassed that with a current loss of 26% from its all-time high set in November 2021. The broader S&P 500 isn't far behind, having lost 16% over roughly the same period.
Further increases in interest rates, paired with global geopolitical tensions and a slowing economy suggest investors will need to be more selective with their stock picks compared to the last two years. With that in mind, here are two growth stocks worth buying now, and one to avoid.
Image source: Getty Images.
The first stock to buy: Nvidia
When it comes to selecting quality stocks, choosing businesses that are focused on the extreme long term is a great place to start. Nvidia (NVDA 3.65%) is a global leader in the design and production of advanced computer chips (semiconductors), which are set to remain in hot demand thanks to rapid progress in new technologies like self-driving vehicles, robotics, and virtual reality.
To prepare for this high-tech future, Nvidia is transitioning from a dominant hardware player to a computing platform company that also makes semiconductors. What does that mean? Well, the future of Nvidia may rest on its software capabilities. In the gaming segment, for example, its GeForce Now platform allows over 14 million users to access their favorite games in the cloud, eliminating the need for installation and updates.
An even better example is Nvidia's autonomous driving technology, which is set to hit the road in 2024 model Mercedes-Benz vehicles, closely followed by cars from Tata Motors' Jaguar and Land Rover. The segment has already racked up $8 billion in sales for Nvidia, but that barely scratches the surface of what could be a $2.1 trillion annual opportunity by 2030.
Segments like that might be small contributors to Nvidia's revenue right now, but they could dominate the company's financials beyond the next decade. In the shorter term, analysts expect Nvidia will generate $34.7 billion in revenue and $5.65 in earnings per share during 2022, representing 29% and 27% growth compared to 2021, respectively.
Image source: Getty Images.
The second stock to buy: DigitalOcean
Cloud computing is one of the most impactful technologies of modern times. It allows companies to migrate their operations into the digital realm, unlocking the ability for employees to collaborate on tasks even if they're in a different building -- or country. DigitalOcean Holdings (DOCN 0.80%) is a provider of cloud services exclusively focused on small to mid-sized businesses with under 500 employees, and it's taking on its multi-trillion-dollar competitors.
The company has tailored its services to suit start-ups and small enterprises that may not have experienced tech employees on the payroll. It offers a dashboard that is simple to use, allowing for one-click deployment of virtual machines. But more importantly, it crushes its competitors on price, with bandwidth starting at $0.01 per gigabyte per month, which is 80% cheaper than its closest competitor.
Whether businesses are managing databases, building applications, or developing software, DigitalOcean has plans ranging from $0 to $15 per month, an incredibly affordable starting point. It had attracted 623,000 customers as of the first quarter of 2022, with 102,400 of them spending more than $50 per month. In the quarter, DigitalOcean logged its highest-ever average revenue per user, and retention rate, suggesting its existing customers are expanding their use of the company's services.
Analysts predict the company will generate $566 million in revenue during 2022. But that's a fraction of what DigitalOcean anticipates is a $72 billion addressable opportunity this year, which could double to $145 billion by 2025. With the company's stock down 76% from its all-time high, now might be the time to take a long-term position.
Image source: Peloton.
The stock to sell: Peloton
Once a pandemic darling, Peloton Interactive's (PTON 2.62%) at-home fitness equipment and digital classes have fallen in popularity now that society has mostly reopened. The company finds itself competing with gyms once again, and is experiencing a decline in both engagement and revenue, resulting in staggering net losses. A new CEO is at the helm and he's making some positive changes, but the smart move is to wait for tangible progress before taking a position.
Peloton announced its financial results for its fiscal third quarter of 2022 (ended March 31), and it revealed a substantial 24% year-over-year decline in revenue, which included a 42% drop in products revenue. Average monthly workouts among Peloton subscribers fell 28%, and that's important because it's a critical measure of how often users are engaging with the company's products.
But perhaps the greatest concern was the collapse in Peloton's gross profit margin. It came in at just 19.1% in the quarter, down from 35.2% in the year-ago quarter, and it triggered a 59% decline in gross profit. The result: a quarterly net loss of $757 million, taking the company's net losses to almost $1.2 billion in just the last six months.
The situation was so dire that Peloton determined its $879 million cash balance wasn't enough to secure the company's future. It just took on $750 million in debt financing to help alleviate any shortfalls, but that creates other issues -- another expense (interest) being one of them.
Peloton stock is down over 90% from its all-time high, significantly underperforming the broader market. The way back from here is paved with uncertainties, so it's best to avoid it until the company's outlook is more stable.
