Stocks just experienced the worst first half of the year since 1970. The sell-off has hit tech investors particularly hard as many of the more prominent growth names on the Nasdaq have fallen more than two-thirds from all-time highs.
However, in recent weeks, tech stocks have ticked slightly higher, and many rose even after missing revenue and earnings estimates. This could signal a near-term end to the bear market, assuming it has not already ended. Such a recovery is a bullish sign for stocks like DocuSign (DOCU 1.29%), Affirm Holdings (AFRM +2.11%), and SoFi Technologies (SOFI +1.23%).
DocuSign has its challenges, but it's not without plenty of upside, too
Jake Lerch (DocuSign): Let's get this out of the way: DocuSign is facing some stiff challenges.
Among its problems:
- CEO Dan Springer recently stepped down.
- No permanent replacement has been named.
- The company slashed its billings guidance for its current fiscal year (the 12 months ending Jan. 31, 2023).
Now, concerns aren't surprising, considering that DocuSign lost 77% of its value over the last 12 months. If a company's shares have cratered in such a way, it implies the business is not running smoothly.
But, for investors willing to stomach some volatility, big stock price declines can offer lucrative upside if a company can execute a proper turnaround.
Can DocuSign do it? I think so; here's why.
NASDAQ: DOCU
Key Data Points
Unlike many tech stocks that have slumped over the last year, DocuSign isn't losing money hand over fist. The company is cash flow positive and closing in on profitability. Analysts expect it to generate $1.72 per share for fiscal year 2023 and $1.94 in 2024.
Also, its balance sheet isn't a concern. The company has over $800 million of cash on hand; net debt is below $210 million.
What's more, DocuSign's product isn't just ubiquitous; it's sticky. Enterprise customers who adopt DocuSign as their e-signature solution will likely stick around. Few organizations want to reinvent the wheel once they have a problem solved. It's simply easier to keep DocuSign rather than risk adopting a new product that might lack certain features or be unreliable.
If that weren't enough, DocuSign is also a potential takeover target. Investors shouldn't rush into the name solely because of that, but it's something to bear in mind.
You can buy this stock now and profit later
Justin Pope (Affirm Holdings): Consumer lending is big business; Americans collectively have roughly $890 billion in credit card debt. Credit cards have spent decades as the go-to for easy, quick lending, but carry many downsides like high interest rates and fees.
Affirm is a buy now, pay later company that aims to provide a more consumer-friendly option. Affirm partners with more than 207,000 merchants, and over 12.7 million users shop using Affirm's website or smartphone app. Users can get instantly approved for lending that covers the item they want at the point of sale.
Whereas credit cards give you an open credit line, Affirm evaluates each item financed; if Affirm doesn't think you can afford to pay it back, it won't approve it. That means you aren't as likely to bury yourself in debt. Roughly 42% of Affirm's loans are interest-free, and the company doesn't charge late or hidden fees of any kind. The company makes money from the interest it does charge and from merchant and interchange fees.
Research company Research and Markets estimates the buy now, pay later market could grow to $39 billion by 2030, averaging 26% annually between now and then. Affirm has partnered with major retailers, including Amazon, Shopify, Target, and Walmart, which could give the company enough exposure to enjoy years of growth if the buy now, pay later trend continues.
NASDAQ: AFRM
Key Data Points
Unfortunately, the stock has fallen roughly 82% from its high due to the current bear market and concerns that consumers will buy now and pay never. A recession could undoubtedly hurt borrowers' ability to repay loans, but so far, it seems under control; just over 2% of loans are 30 days or more past due.
Meanwhile, Affirm has long-term plans to expand its ecosystem into other aspects of personal finance, including its upcoming Affirm+ debit card and app. The stock's sharp fall could mean significant investment returns if the company can show that its business model works and can endure the economic turbulence.
This emerging fintech is becoming a one-stop shop for personal finance
Will Healy (SoFi Technologies): Negative sentiment from outside forces has punished SoFi stock. SoFi has a strong presence in the student loan market, and the continuing moratorium on student loan payments has bred uncertainty about how well the company can perform.
Moreover, since the current market is less tolerant of unprofitable, high-growth stocks, SoFi has struggled to gain traction. Such factors may have contributed to the 67% drop in the stock price from its high.
NASDAQ: SOFI
Key Data Points
But despite those challenges, SoFi stands out as a high-conviction growth stock in an increasingly crowded fintech space. It is one of the few fintechs to hold a bank charter, by virtue of its purchase of Golden Pacific Bank. This allows it to make loans without involving a third party.
Also, its ownership of the Galileo API and Technisys gives it a critical role in the industry. These platforms power offerings like ACH payments and cards for other firms. To this end, SoFi has placed itself on a path to become what it describes as the "[Amazon Web Services] of fintech." This means it will support an "end-to-end banking technology stack" with services ranging from checking to powering cards to lending.
Such services have also bolstered its net revenue, which came in at $693 million for the first half of 2022, 62% more than in the same period of 2021. Since expenses grew by only 17%, SoFi reduced its net loss for the first two quarters of 2022 to $206 million, down from $343 million in the first half of 2021.
Also, the $830 million to $835 million in revenue expected for the second half of 2022 would amount to a year-over-year increase of around 50%. This should mean that it will continue to grow at a rapid pace for the foreseeable future.
Furthermore, its P/S ratio has dropped to 5, close to the levels of last fall. That sales multiple may rise further considering that SoFi stock increased 28% the day after its second-quarter earnings release. Additionally, as it continues to attract more users to its platform, the stock could deliver outsize returns for shareholders who buy at these levels.
