The Nasdaq is in bear market territory, and many top growth stocks are down along with it. That can make it seem like solid investments don't look so great anymore. But the reality is that ever since the pandemic started and more retail investors began buying up stocks, there's been a disconnect between stock valuations and their underlying businesses. At their peak, many growth stocks were likely grossly overvalued. And now, amid this sell-off, many have become significantly undervalued.
1. Teladoc Health
Teladoc's stock got hammered after it released a brutal earnings report last month where impairment charges totaled a whopping $6.6 billion for the period ending March 31. The company's big mistake? Like many investors during the meme hype, it overpaid badly for an investment in chronic care company Livongo Health, which led to the eye-popping writedown this past quarter.
As a result, its shares are down more than 60% year-to-date, making the Nasdaq's 26% decline look modest.
But those quarterly results weren't as bad as they looked, because Teladoc still generated growth and its number of virtual visits continued to grow. In the long term, the stock still offers investors significant potential as telehealth is sticking around. You don't need to look any further for proof of that than health insurance giant UnitedHealth Group, which is looking to utilize telehealth more as a way to keep costs down. In some cases, patients will need to have virtual visits before being able to see physicians in-person.
And what better way to invest in telehealth than buy one of the premiere companies in the space? Teladoc has partnered with Microsoft to integrate its service with the tech company's Teams messaging platform. Even Amazon, which is starting to offer telehealth services of its own, partnered together to make Teladoc's services available on Amazon Alexa. Last year, Teladoc earned top marks from a J.D. Power telehealth survey in a variety of areas, including customer service.
Teladoc's future looks bright despite a one-time writedown. The business has generated positive free cash flow in three of the past four quarters, and although it isn't profitable yet, its high gross margins of more than 65% make it likely that it will get out of the red in the not-too-distant future.
These are some of the reasons that even though I'm invested in Teladoc, I don't mind if the stock continues to fall in the near term -- it will give me a great opportunity to average down. In the long haul, I have little doubt that the stock will bounce back. Buying at these levels could lead to some incredible returns for investors; just doubling in price would mean the healthcare stock is back to trading where it was less than eight weeks ago.
2. Upstart Holdings
Upstart Holdings is a promising and disruptive company that could make the world of lending much more efficient. The fintech stock's use of artificial intelligence adds efficiency to the underwriting process. Not only are more data points evaluated, but the process is also quicker.
What's also special about the business is its impressive growth even as it posts strong profits along the way. Sales for the first three months of the year grew 156% year-over-year to $310 million. Meanwhile, the company's bottom line tripled to $32.7 million. Upstart's profit margin of 10.5% this past quarter also showed improvement vs. the 8.3% margin it reported in the prior-year period. The company's rapid growth hasn't led to surging costs, which is an excellent sign for investors that the business is being well-managed.
What led to a sharp sell-off this month was news that the company was downgrading its guidance amid rising interest rates. From a previous forecast of $1.4 billion for 2022, Upstart now anticipates $1.25 billion in revenue this year. Although that's disappointing, it hardly seems a reason to shave more than 50% off a company's valuation in a single day. Year-to-date, it's down more than 72%.
This looks to me like another overreaction in an earnings season that has been filled with them. Upstart's business still looks strong, and buying the stock at a more reasonable price-to-earnings multiple of 25 (vs. the 90+ it was trading at earlier in the year) could make this a steal of a deal right now.