The Nasdaq is falling and in bear market territory. That much is obvious. What may not be so obvious, however, is which stocks on the exchange are likely to bounce back from their steep sell-offs. Many growth stocks on the Nasdaq were trading at inflated premiums for far too long, and a correction was likely overdue.
But there are a couple of stocks that stand out as potential bargains over the long run. DexCom (DXCM -2.67%) and Nvidia (NVDA -10.01%) both have promising futures beyond just this year and the next. Their potential in the years ahead is what makes these stocks among the best buys out there for long-term investors.
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1. DexCom
Diabetes company DexCom has fallen by more than 40% since the start of this year, putting its losses far steeper than the S&P 500, which is down 14%. DexCom's high price-to-earnings (P/E) ratio of 150 may have something to do with the sell-off as investors have been shedding high-valued stocks this year. More recently, there was news that the company was looking to merge with insulin pump maker Insulet.
News of a merger can send a stock down because it usually means shares will be issued to fund the deal (i.e. dilution for existing shareholders), and investors may not necessarily be on board with the transaction itself or the price tag. However, on Tuesday, DexCom squashed those rumors, saying that it "is not in active discussions regarding a merger transaction at this time," which gave the stock a bit of a bounce in price.
DexCom's business doesn't need a big merger; the company is generating some good growth that's going to continue for years. Its continuous glucose monitoring devices (CGMs) help people manage their glucose levels and have become essential tools for many people with diabetes. That's evident in how resilient the company's performance has been. Through the first three months of 2022, DexCom's sales totaled $628.8 million and rose 25% year over year.
The necessity of ongoing diabetes care along with the overall growth potential in the market is what makes DexCom an incredibly attractive investment for the long haul. Analysts at Grand View Research estimate that the global market for CGMs will grow at a compound annual rate (CAGR) of 10.1% until 2028. And with DexCom as a leader in that segment, there should be no shortage of opportunities for the business to get bigger. The healthcare company's high gross margin of more than 60% also means that its profits should rise along with that growth, potentially bringing down its P/E multiple over time.
2. Nvidia
Chipmaker Nvidia reported its latest earnings report last week, which helped give the stock a bit of a boost. However, since the start of the year, shares of Nvidia remain deep in the red, down 37%.
In the earnings report, Nvidia reported revenue of $8.3 billion for the period ending May 1, which grew 46% year over year. For the next quarter, the company anticipates that its top line will fall slightly to $8.1 billion, citing a drop in sales in Russia and China as the reasons for the declining numbers.
Nvidia is another stock that has typically traded at high multiples of earnings. A year ago, investors were paying 90 times the company's profits. Today, that ratio is closer to 50. As with DexCom, Nvidia's gross margins are fairly high at 67%. Long-term investors know that as long as the growth opportunities are there, the P/E multiple shouldn't be a deterrent as profit growth looks inevitable.
And growth opportunities are not something Nvidia lacks. The chip shortage in the world today affects multiple industries as more and more things are being digitized and connected to the internet. The global semiconductor market will grow by a CAGR of 9.2% until 2029, according to projections from Fortune Business Insights. Nvidia's omniverse platform, which is effectively the metaverse but for software engineers, could unlock even further opportunities down the road for the business. The company previously estimated that there could be "up to 40 million virtual world creators and designers" who could seek access to the platform.
The growth potential the company has combined with its great margins are why Nvidia's potential remains massive, and why investors should take advantage of the growth stock's fall in value this year. It's one of the smartest tech stocks to buy and hold.
