Economic uncertainty sent the Nasdaq Composite tumbling into a bear market this year. The tech-heavy index is currently down 35% off its high. Those losses can be scary, but investing legend Shelby Davis once said: "You make most of your money in a bear market; you just don't realize it at the time."
No one knows when the economy will improve or when the bear market will end, but both of those things will happen eventually. In the meantime, many promising growth stocks look cheap. For instance, Shopify (SHOP 3.49%) and Zoom Video Communications (ZM -1.52%) are trading near a 52-week low, and both stocks are worth buying.
1. Shopify: Building a fulfillment network and growing upmarket
Canadian e-commerce company Shopify lost 79% of its value over the past year. Stimulus-fueled spending gave way to softening consumer demand amid lingering inflation, and operating expenses continued to climb to support growth initiatives. That dynamic led to a disappointing third-quarter earnings report. Revenue rose just 22% to $1.4 billion, and Shopify reported a non-GAAP loss of $30 million.
However, investors should expect growth to reaccelerate when those economic headwinds ease. Shopify is the market leader in e-commerce software, and the second-largest e-commerce business in the U.S. based on gross merchandise volume (GMV). That positions the company for strong future growth. Retail e-commerce sales in the U.S. alone will increase by 12% annually to reach $1.7 trillion by 2026, according to eMarketer.
Management is also pursuing a potentially game-changing strategy. Most notably, the Shopify Fulfillment Network (SFN) -- an ecosystem of warehouses, carrier partners, and last-mile delivery providers currently under construction -- will simplify three critical stages of logistics for merchants: inbounding freight, distributing inventory to fulfillment centers, and delivering orders to customers. The SFN will reach scale in late 2023, but Shopify has already seen positive momentum. The number of merchants using at least one logistics service climbed nearly 80% in the third quarter and fulfilled orders soared 450%.
Shopify is also growing upmarket with Shopify Plus, a commerce suite for larger businesses. Plus GMV continued to outpace total GMV in the third quarter, and recent product innovation should keep that momentum alive. Plus merchants can now access tools for marketing, cross-border commerce, and business-to-business commerce, as well as sophisticated point-of-sale software. Those upgrades make the platform a more compelling option.
Shares currently trade at 8.1 times sales, a bargain compared to the three-year average of 36.2 times sales. That's why this growth stock is a screaming buy.
2. Zoom: Gaining momentum beyond videoconferencing software
Zoom delivered triple-digit revenue growth for five consecutive quarters following the onset of the pandemic, but growth decelerated sharply over the past year and disillusioned investors sold the stock hand over first. Zoom saw its share price plunge 73% during that time, and its latest earnings report failed to restore investor confidence. In the second quarter of fiscal 2023 (ended July 31, 2022), total revenue climbed just 8% to $1.1 billion and free cash flow plunged 50% to $229 million.
Let's put those numbers in context. First, Zoom is contending with currency fluctuations and high inflation, both of which put pressure on growth. Second, Zoom is still dealing with fallout from the pandemic. The company groups its customers into two cohorts:
- Enterprise customers are engaged by a direct sales team.
- Online customers get products via self-service channels.
Online customers exploded during the pandemic, but that cohort churns at higher rates. So Zoom shifted its focus to enterprise customers, a group that shows high retention and offers extensive upsell opportunities. That part of the business is still growing quickly. Enterprise customers climbed 18% in the last quarter, while revenue from enterprise customers rose 27%, and the average enterprise customer spent 20% more.
With that in mind, investors should expect total revenue growth to reaccelerate as the global economy improves and Zoom's customer mix shifts toward the enterprise cohort.
Zoom is the market leader in videoconferencing software. Zoom Meetings earned a reputation for simplicity and reliability during the pandemic, and that brand recognition paved the way for a land-and-expand growth strategy that is gaining momentum. Zoom Phone surpassed 4 million seats in August, up 100% over the past year. CFO Kelly Steckelberg also noted early traction with two newer products: Zoom Contact Center is an omnichannel customer service solution, and Zoom IQ for Sales is AI-powered software that analyzes conversations in Zoom Meetings to help sales teams work more productively.
In a nutshell, Zoom benefits from brand recognition and a strong market presence in videoconferencing software, and those advantages are helping the company gain traction in other communications software verticals. Right now, Zoom Meetings is the only product that represents more than 10% of revenue, meaning Zoom has a long runway for growth. In fact, management puts its addressable market at $91 billion by 2025.
With that in mind, shares currently trade at 5.5 times sales, just above the all-time low of 5.2 times sales. That creates an attractive buying opportunity for long-term investors.
