The U.S. equity market has been challenged in 2022 as soaring inflation, rising interest rates, continued pandemic-related supply chain issues, and fears of recession have combined to negatively impact investor sentiment. The major indices are all down by double-digit percentages so far this year.
While predicting how the market will behave short-term is a fool's errand, history has shown that a market rebound will eventually come and a bear market has always been followed by a strong market recovery. That suggests savvy investors should focus on picking up stocks of fundamentally sound companies while their prices are relatively low.
Airbnb (ABNB -0.33%) and Advanced Micro Devices (AMD 1.15%) are two growth stocks trading at a discount right now that are worth further consideration. Let's look at why you might want to buy these two on the dip.
1. Airbnb
Airbnb is a leading vacation rental company that has been a disruptive force in the travel industry thanks to the resilience and flexibility of its asset-light marketplace business model. The model allows it to adapt itself rapidly in the face of extreme macroeconomic pressures. Airbnb mainly offers a platform enabling its 4-million-strong community of hosts to rent various types of properties to guests across the world. In return, the company collects fees from both hosts and guests.
Unlike traditional hotel chains, which require significant capital to expand capacity, Airbnb can increase its rental options for customers far easier and at a fraction of the cost. The company benefits from the powerful network effect, as many previous guests turn into hosts in a bid to earn some extra passive income. This helps the company rapidly ramp up capacity during peak travel times as well as reach rural or difficult-to-reach locations by deploying minimum capital. Airbnb passes on this cost advantage in the form of lower prices to its guests, which helps to attract even more new guests. This flywheel effect is proving to be a critical competitive advantage for Airbnb.
Airbnb's brand power is evident, considering that its host community has welcomed over 1 billion guests across over 220 countries in the past 15 years. The company has reported growing demand in cities, rural destinations, and cross-border locations. Airbnb also saw rapid growth in the long-term stay (28 days or more) category.
Despite difficult prior-year comps, Airbnb reported impressive performance in the second quarter of fiscal 2022 (ended June 30). The company reported 103 million Nights and Experiences booked and a profit of $379 million, the highest ever in any quarter to date. The company has a cash balance of $10 billion on its balance sheet and generated a free cash flow of $795 million in the second quarter.
Airbnb estimated its total addressable market to be worth $3.4 trillion. With the company's current market penetration of just over 0.2% (trailing-12-month revenues of $7.4 billion), there is still much runway left for this market leader to grow in the coming years.
Despite its strong business model and ongoing performance, share prices for the stock are down about 25.5% so far this year. The cause is likely related more to macroeconomic pressures and a potential recession than any real Airbnb-specific issues. This suggests the stock has strong upside potential as the economy recovers.
2. Advanced Micro Devices
Chipmaker Advanced Micro Devices proved to be quite resilient, despite a downturn in the semiconductor industry. In the second quarter of fiscal 2022 (ended June 30, 2022), the company reported a 70% year-over-year jump in revenue to $6.6 billion and an 83% year-over-year increase in net income to $1.7 billion. AMD also guided for $26 billion to $26.6 billion in full-year revenue, implying a jump of 60% from 2021 at the midpoint and a non-GAAP (adjusted) gross margin of 54%. These are excellent numbers, especially at a time when the semiconductor industry is taking a hit because of declining chip demand in the consumer segment.
AMD has estimated its target addressable market to be worth $300 billion, encompassing opportunities in areas such as personal computers (PCs), gaming, data center, automotive, communications, and embedded systems in the next five years.
Analysts at Gartner expect semiconductor demand in the global data center market to grow 20% year over year in 2022, driven by the rising adoption of cloud computing, analytics, artificial intelligence, and high-performance computing technologies. AMD is proving to be a frontrunner in this space and has been grabbing market share from Intel for 13 quarters in a row. The company accounted for 13.9% of the server processor market share at the end of the second quarter. AMD's second-quarter data center revenue rose 83% year over year to $1.5 billion, propelled by rising demand for EPYC server processors across enterprise and cloud customers. The company is also gearing up for the release of the fifth-generation EPYC series, Turin, in 2024, thereby focusing on further improving performance.
AMD is also making rapid inroads in the automotive market, an area that has seen increasing chip usage in infotainment systems and advanced driver-assistance systems. The acquisition of the leading adaptive computing player, Xilinx, can also prove to be a big positive for the company in the long run. Since adaptive computing enables the reconfiguration of semiconductor hardware in real-time as per the users' requirements (post-manufacturing), AMD seems poised to capture a share in this relatively underserved market.
AMD's share prices remain down by nearly 41% so far this year. Considering that the company is riding several secular megatrends, there is a potential for the stock to enjoy plenty of growth in the years to come.
