Whether you're new to investing or you've been at it for decades, 2022 has been a rotten year. Soaring interest rates are increasing the costs of capital, which could be a huge problem for companies that rely on a steady influx of capital to fuel growth.
At times like these, investors need to remember that not all growth stocks are created equal. These well-run businesses are already generating sustainable profits. With an ability to grow under their own steam, rising interest rates aren't nearly as important to their long-term prospects.
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Despite strong profitability, a stock market scorned for growth stocks, in general, has driven these gems 54.1% and 64.2% lower this year. Here's why scooping them up at their discounted prices could lead to huge gains down the road.
Zoom Video Communications
So far this year, Zoom Video Communications (ZM 0.15%) shares lost a frightening 54.1% of their value. Now, you can scoop up the stock for just 26.1 times trailing earnings. At this multiple, the market is telling us it expects Zoom's bottom line to grow only a little faster than the average stock in the Nasdaq 100 index, which trades at 23.4 times earnings.
With the world's most popular unified communications platform, we can look forward to growth rates from Zoom that are well above average. During its fiscal second quarter ended July 31, 2022, the number of customers contributing more than $100,000 in revenue annually jumped 37% year over year.
Enterprise-level Zoom customers are increasingly drawn to products that do more than just handle virtual meetings. For example, Zoom Phone, a unified platform for video, voice, chat, and collaboration that launched in 2019, passed 4 million paid seats in August. That's twice as many as it had a year earlier.
Zoom's also seeing strong uptake of more recently launched products, like Zoom Contact Center and Zoom IQ for Sales. A steady stream of new products popular with deep-pocketed clients is just what this stock needs to start soaring again.
Lovesac
If you'd like to invest in something more tangible than a communications platform, Lovesac (LOVE 5.38%) is right up your alley. This company is named after high-end beanbag chairs that it still sells, but the vast majority of revenue these days comes from sectional seating called Sactionals.
Warehousing challenges and a lack of brand loyalty make furniture manufacturing a low-margin business but not the way Lovesac does it. The company reported a 53% gross margin in the first half of the year. Customers gladly pay top dollar for Sactionals because they're hyper-customizable and able to expand as families grow.
The ability to replace sagging cushions and faded upholstery drives a lot of repeat business. More than two-fifths of all transactions in Lovesac's fiscal 2022, which ended on Jan. 31, were from existing customers. Unlike many companies that saw a surge in demand during COVID-19 lockdowns, Lovesac's easily scalable operation is still generating a significant profit.
Lovesac shares are currently trading at just 9.1 times earnings. That's an extremely low multiple for a company that just grew second-quarter revenue by 45% year over year. Pulling the stock out of the bargain bin and stuffing it into your portfolio looks like a smart move right now.
