Facing a weaker economy, rising interest rates, and other destabilizing market forces, investors generally have been shifting their portfolios away from growth stocks. The growth-heavy Nasdaq Composite index has fallen by roughly 25% from the peak it hit last year, and there's a good chance your portfolio is feeling the squeeze.
The market is undeniably shaky right now, but the volatility has also created opportunities to invest in top companies at amazing discounts. With that in mind, we asked a trio of Motley Fool contributors to identify which stocks they viewed as most worth pouncing on at today's prices. From where they sit, Starbucks (SBUX +0.02%), Airbnb (ABNB +0.22%), and Netflix (NFLX +0.16%) look like some of the best beaten-down growth stocks you can buy right now.
Image source: Getty Images.
Take a summertime sip from this beverage behemoth
Daniel Foelber (Starbucks): Starbucks, both as a company and a stock, is undergoing a makeover. The company's early growth was powered by its proliferation of the espresso/internet café business model. But today, that model is widespread and gives Starbucks few competitive advantages over locally owned coffee shops that offer comparable products with arguably better atmospheres. However, the coffee giant has more than 27 million Starbucks Rewards members and generates 75% of its sales from mobile orders, deliveries, and drive-thru customers. That gives Starbucks a major leg up over competitors large and small.
To grow its grab-and-go ordering infrastructure, Starbucks needs investment capital. And that means fewer stock buybacks. When former CEO Howard Schultz stepped back in as interim CEO in early April, he immediately suspended what would have been the largest share buyback program in the company's history in favor of investing in the core business. It's a bit of a gamble, as Starbucks will need to prove that it can allocate capital in a way that benefits shareholders more than directly buying back stock would. But Starbucks returns capital in ways other than buybacks.
Unlike many growth stocks, Starbucks pays a sizable dividend. At the current share price, that payout offers a 2.5% yield, and management has raised the dividend for 11 consecutive years. And while the company cut its share repurchase program, there has been no suggestion that it will alter its pattern of dividend hikes. Starbucks typically announces a dividend raise of $0.04 or $0.05 per share per quarter in August or September. So if we don't hear anything from Starbucks when it reports fiscal Q3 2022 earnings in a couple of months, that would be cause for concern. But for now, more dividend raises appear to still be in the cards.
The next growth chapter for Starbucks looks like a massive global market opportunity. Yet the stock is down 40% from its all-time high and trading at a price-to-earnings ratio of 20.5. Throw in the appealing dividend, and this looks like a great opportunity to add a name-brand company to your portfolio that will pay off for decades.
Use the market's skittishness to buy this travel leader
Keith Noonan (Airbnb): Many of the market's biggest losers in recent months had previously been riding performance tailwinds stemming from pandemic conditions. Software, entertainment, and communications companies that experienced surging engagement when people were making their most intense social distancing efforts now face difficult performance comparisons as our behaviors shift back toward their pre-pandemic norms.
That's all coming in conjunction with multiple compression for the market at large, which has led to some brutal stock price declines.
Meanwhile, Airbnb has actually seen its business surge as social distancing and travel restrictions have eased, but the company's stock has still participated in the stark pullback for growth stocks at large. The short-term rental specialist's share price is down 30% year to date and off 46% from its high. Yet its business and long-term outlook have never looked stronger.
Airbnb's revenue surged by roughly 70% year over year in the first quarter to $1.51 billion, and its adjusted loss of $0.03 per share was far better than the average analyst estimate for a loss of $0.29 per share. Accounting for seasonality, the business will almost certainly post a substantial profit this year, and with the shares trading at roughly 43 times this year's expected earnings, they look attractively valued -- particularly given the strength of the growth underway.
The travel industry remains poised for long-term expansion, and Airbnb looks well-positioned to take advantage of the unfolding digital-transformation and work-from-anywhere trends. With the company posting stellar pandemic-rebound performances, its substantial valuation decline looks to be a case of the baby being thrown out with the bathwater. The stock's risk-reward profile is very attractive, and I think investors who take a buy-and-hold approach will bank fantastic returns.
Netflix is down, but certainly not out
James Brumley (Netflix): I completely understand why Netflix shares have been up-ended this year. This company is not only the biggest and best-known name in video streaming, it arguably created the entire industry. Serious competition has been building since late 2019, but we've never really seen Netflix struggle to maintain its historical growth pace -- until now. In part due to the impact of alternatives like HBO Max and Walt Disney's (DIS +0.83%) Disney+, Netflix is suddenly experiencing a growth stall that was once unthinkable.
However, the stock is down by more than 70% from November's high, and I don't think it's a stretch to say that the sellers have overshot their target.
NASDAQ: NFLX
Key Data Points
For instance, the market is not pricing the looming launch of a cheaper, ad-supported service into Netflix shares. Co-CEO Reed Hastings initially floated that idea back in April as something the company would "figure out over the next year or two." Now, the rumors say the schedule has been accelerated, and suggest it could launch as soon as October.
And we know the ad-supported model works. Most subscribers to Disney's Hulu service take the option with commercials, and the bulk of HBO Max's most recent growth seems to coincide with last June's launch of an ad-supported tier. Disney is also developing an advertising-backed version of Disney+ that's slated to debut before the end of this year. These options are important to increasingly cost-conscious consumers, and I see no reason Netflix won't be able to rekindle its growth by jumping on the bandwagon. I wouldn't be at all surprised if its results from doing so are even better than expected. If they are, the stock's recent weakness will look, in retrospect, like an even stronger buying opportunity.
