Editor's note: This article has been corrected. RingCentral provides software as a service (SaaS) solutions that help businesses keep their workforces connected.
Even with some recent recovery in the market, many growth stocks are down precipitously from their highs. The growth-heavy Nasdaq Composite index is still teetering on the edge of a bear market, but for investors willing to take on potential volatility, the good news is that some very promising businesses are still trading at huge valuation discounts.
To help put investors on the trail of growth stocks capable of delivering explosive returns, a panel of Motley Fool contributors has profiled top picks trading at attractive valuation levels. Read on to see why they believe long-term investors can score big wins by investing in Advanced Micro Devices (AMD 0.69%), Cloudflare (NET -1.47%), and RingCentral (RNG -1.62%) at today's prices.
A lesson in growth versus value
Daniel Foelber (Advanced Micro Devices): AMD stock is down nearly 40% from its all-time high, which is worse than the 27% decline the iShares Semiconductor ETF has endured. However, AMD continues to gobble up market share and grow its top and bottom lines at a breakneck pace while sustaining a high gross profit margin. The five-year chart says it all, as AMD's trailing-12-month revenue has more than tripled in five years, and profits have increased more than 37-fold.
AMD Revenue (TTM) data by YCharts
AMD's most recent quarter included better-than-expected results and strong long-term guidance that supports the narrative that AMD continues to take market share from Intel (NASDAQ: INTC) in the PC processor industry. For several years now, AMD has underpromised and overdelivered while Intel has spent the better part of the last decade facing delays, failed projects, and slowing growth. Intel stock has paid the price, underperforming the market in recent years, and has failed to pass its all-time high set in the year 2000, right before the dot-com bust. Intel has a price-to-earnings (P/E) ratio of just 7.5 and a dividend yield of 4.1%, while AMD's P/E ratio is a much more expensive 42.5 and it doesn't pay a dividend.
AMD stands out as the better company and the faster grower, while Intel is the cheaper stock with a dividend to boot. But Intel believes the worst is behind it. On its second-quarter 2022 earnings call, Intel CFO David Zinsner said: "the market turbulence and updated outlook are disappointing. However, we believe our turnaround is clearly taking shape and expect Q2 and Q3 to be the financial bottom for the company."
Unfortunately for Intel, it failed to embrace the smartphone revolution and has fallen behind in its core categories. The chip business is extremely fast-growing where just a few years make a big difference. AMD has given investors every sign that it is leading the next wave of semiconductor technology, while Intel has given every reason why it should continue to underperform. Until Intel can make good on its promises, AMD stands out as the better buy despite being a more expensive stock. Comparing AMD to Intel is a good lesson in what "value" really means. If AMD continues to gain market share, it could one day surpass Intel in revenue and earnings. Long-term investors are more interested in where a company will be in 10 years than where it is today. Under that logic, AMD seems like a better value than Intel even though its current earnings relative to its market cap are much lower.
Invest in the evolution of the internet
Keith Noonan (Cloudflare): When it comes to making sure your favorite internet destinations are accessible and running smoothly, few companies are more important than Cloudflare. The web specialist provides content delivery network (CDN) services that speed up the ability to send and access internet information. It also provides protection from distributed denial of service (DDoS) attacks, as well as a variety of other cloud-based software offerings that help ensure users are able to smoothly access websites and applications.
However, Cloudflare also has a highly growth-dependent valuation, and it's seen dramatic sell-offs as inflation, rising interest rates, and other factors have caused investors to become much more risk averse. The stock now trades down roughly 64.5% from the lifetime high that it hit last November.
Despite the big sell-off, Cloudflare has continued to post impressive business results and looks primed for more big growth over the long term. Sales climbed 54% year over year in the second quarter to reach $234.5 million, and the company increased its large-customer count by 212 to reach 1,749 in the period. With large customers now accounting for 60% of sales, Cloudflare's growth engine is looking very strong, and the business's non-GAAP (adjusted) gross margin of 78.9% last quarter points to big earnings growth potential down the line.
The business should be able to continue posting strong sales growth because it's providing services that are virtually essential for the information age. With more websites and applications coming online all the time, and internet services only becoming more central to business and everyday communications, Cloudflare stock looks primed to deliver big wins for long-term investors.
That's opportunity ringing your doorbell
James Brumley (RingCentral): I understand why investors began selling their RingCentral shares in earnest early last year. The virtual-meeting and online-collaboration company's stock soared during the early days of the COVID-19 pandemic, when people were spending so much more time working at home rather than at the office. Once lockdowns began to ease, though, the market began to understand that this ticker's 2020 run-up of 124% following 2019's 100% advance was simply too much, too fast.
This stock's 89% pullback from 2021's peak, however, is just as over-the-top... for the opposite reason.
Largely lost in the noise of all this volatility is that this company is still growing, and doing so mostly thanks to its subscription business.
Last quarter's numbers put things in perspective. The top line was up 28% year over year, pushing non-GAAP profits up from $0.32 per share to $0.45. The company's looking for revenue growth along the same lines for the remainder of the year, but RingCentral upped its profit guidance from a range of $1.83 to $1.87 to a range of $1.91 to $1.95 per share for 2022. Notably, subscription revenue accounts for 95% of its total top line now, which is usually high-margin revenue since once they're in the fold these customers don't need to be won over again.
In this vein, a big increase in sales and marketing spending is the key reason the company's still losing money under generally accepted accounting principles (GAAP).
For investors who can look further down the road, the opportunity is there. It's just going to take a little more for RingCentral to achieve the scale it needs. With the bulk of its value being wiped away, however, the stock could start to rebound well before that happens, in anticipation of such a development.
