The 2022 bear market continues to wreak havoc on high-growth stocks. With the Federal Reserve poised to continue hiking interest rates in an attempt to get inflation back under control, many stocks remain under pressure -- especially those that either don't yet turn a profit, or generate minimal profit as they spend heavily to promote expansion. Many of these stocks are down well over 50% from all-time highs.
That doesn't mean they should be forgotten, though. While market optimism had gotten out of hand in 2021, there are plenty of smaller up-and-coming businesses now trading for serious discounts to their long-term potential. These three Fool.com contributors think Marqeta (MQ 4.05%), Magnite (MGNI 1.73%), and Doximity (DOCS -0.85%) are such companies.
Marqeta's sell-off is way overdone
Billy Duberstein (Marqeta): Fintech card-issuing platform Marqeta sold off hard immediately after its recent second-quarter earnings report. But for those with a long-term perspective, that could be a huge opportunity.
Marqeta's innovative platform of application programming interfaces has revolutionized modern card issuing. It allows a range of companies -- including traditional financial institutions; buy now, pay later platforms; food delivery services; cash management companies; and cryptocurrency platforms -- to issue cards in a more flexible, real-time fashion than they ever could before.
There were two primary reasons for the sell-off: First, while Marqeta beat revenue and profit expectations on its recent earnings release, management did include some deceleration in its guidance, forecasting 37% growth, down from the torrid 53% pace in the second quarter.
Second, founder and CEO Jason Gardner announced that he and the board will be searching for a new CEO. Even though Marqeta is down a lot from its all-time highs and its $27 June 2021 initial public offering (IPO) price, Gardner and his team have executed very well. The company has never missed revenue expectations in any quarter, and has continued to rack up impressive customer wins including Citigroup (C 2.82%) and up-and-coming crypto plays like Coinbase (COIN 4.68%). So to see him step down definitely threw investors for a loop.
However, the sell-off seems like an overreaction. As for the third-quarter guidance, with the rapid tightening of financial conditions and declines in stock prices of fintech customers, it's no surprise to see some new customers slow down the pace of new Marqeta-powered launches. But you shouldn't let the temporary slowdown cloud your perspective on the long-term opportunity.
The company powered less than 1% of the $6 trillion in U.S. card-based transactions last year, and far less than the $30 trillion globally. And the tough market environment should only stave off would-be start-up competitors, solidifying Marqeta's first-mover advantage.
Gardner is retiring but will remain executive chairman and Marqeta's largest shareholder. While it's never great to see a founder step down, the world of payments and banking could actually view the appointment of an industry veteran as a positive. Marqeta's opportunity is partly predicated on getting large financial institutions to adopt its platform more widely, and it might be easier to convince these prospective customers if there were a financial veteran at the helm, rather than a technology start-up founder from Silicon Valley.
As far as high-growth software and payments processing companies go, it also looks quite cheap at just 6.6 times sales, but only 4 times sales when stripping out its roughly $1.7 billion in cash and securities and no debt. Don't let its low price fool you: Marqeta's total market opportunity in modern card issuing is massive.
Magnite can roll with these punches
Anders Bylund (Magnite): It's fair to say that Magnite deserved a correction in 2022. It provides auction-style markets to connect ad publishers with ad spaces on digital content platforms, and the market has been rough this year.
Web browsers are tightening up their privacy features, which could reduce the effectiveness of targeted advertising. Several massive media companies are bringing in ad-supported video services, led by Netflix (NFLX 4.17%) and Disney's (DIS 1.54%) Disney+. But the House of Mouse picked Magnite rival The Trade Desk (TTD 4.15%), and Netflix didn't even select a firmly established ad manager. Instead, the streaming giant is going with a Microsoft (MSFT 1.65%) solution.
As a result, advertising revenue has been trending down this year, and Magnite fell far short of analyst estimates in August's second-quarter report. So I get why the stock is down more than 50% in 2022, falling nearly 70% over the last 52 weeks.
At the same time, its shares are now spring-loaded for a massive rebound when digital advertisers turn on their order spigots again. They will, and Magnite continues to be a front-runner in the buy-side advertising space.
The stock trades at bargain-bin valuation ratios such as 9 times free cash flow and 2.1 times sales. Both of these readings stand far below their three-year averages of 111 and 6.6, respectively.
And I see no reason to panic over the fact that Magnite missed out on a couple of top-shelf contracts. You can't win them all, and generally speaking, the presence of Disney+ and Netflix in the video-based advertising market should drive higher interest in that business idea.
So times are hard right now, but Magnite is still generating robust cash profits during this downturn. This looks like a fantastic time to buy digital advertising stocks in general, and the dramatically discounted Magnite stock in particular.
Doximity keeps growing, but the stock hasn't budged much -- yet
Nicholas Rossolillo (Doximity): Shares of Doximity, the digital platform for medical professionals, are down nearly 70% from their all-time highs. The stock is actually close to its all-time lows since its IPO in the summer of 2021. This comes even though the company beat its own financial outlook for the first quarter of fiscal 2023 (the three months ended June 30). What gives?
While Doximity did indeed beat guidance (revenue of $90.6 million, versus an outlook for as much as $89.6 million provided a few months prior), it downgraded full-fiscal-year 2023. Revenue is now expected to be $424 million to $432 million (down from $454 million to $458 million before), and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are now expected to be $178 million to $186 million ($192 million to $196 million before). Management blames some budget tightening among pharmaceutical companies, one of its biggest revenue generators.
Doximity believes this slowdown in spending for its services will be temporary given that its digital platform helps users make better use of data and more-efficient use of time. Management is doubling down on its efforts to spread the word among big pharma players about the benefits of using its application.
Even with the slowdown, though, the revised guidance implies about 25% year-over-year revenue growth, and a healthy 43% adjusted EBITDA profit margin. Hardly anything to get too upset about.
Additionally, Doxmity has always focused on profitable growth, rather than all-out expansion. This is paying off in a big way. First-quarter free cash flow was up 31% year over year to $42.6 million, and the company ended June with $776 million in cash and investments and zero debt. Given that Doximity's market cap sits at about $6.6 billion, nearly 12% of this small healthcare software technologist's valuation is made up of liquidity on the balance sheet.
Shares trade for 43 times enterprise value to free cash flow -- a premium price, but not an unreasonable one in my opinion considering Doximity's long-term potential. I'm a buyer at these levels.
