What a difference a year makes. Last year, growth stocks were the primary reason the major U.S. stock indexes pushed to all-time highs. In 2022, these same growth stocks are what have dragged all the major stock indexes into bear market territory. That includes the Nasdaq 100 -- an index comprised of the 100 largest nonfinancial stocks listed on the Nasdaq exchange.
But in these instances of pain for investors, there's often opportunity -- and this time will prove no different. Among the Nasdaq 100 companies are two historically cheap stocks that patient investors can confidently buy hand over fist. But seeing as how not every company can be a winner, there's also a Nasdaq 100 stock that you would be better off avoiding like the plague.
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Nasdaq 100 stock No. 1 to buy hand over fist: PayPal Holdings
The first no-brainer buy among the Nasdaq 100 is fintech stock PayPal Holdings (PYPL -1.83%), which has lost in the neighborhood of three-quarters of its value over the past 16 months.
The biggest knock against PayPal is historically high inflation. As the price for goods and services climbs at a faster pace than wages, it reduces or eliminates discretionary spending for low-earning workers. In other words, high inflation almost certainly means a slowdown in transactions conducted on its digital payment networks.
The bear market has done PayPal no favors, either. Most growth stocks were taken to the woodshed in 2022 -- especially if they had a premium valuation. At its peak last summer, PayPal was being purchased for around 50 times what Wall Street believed it would earn in 2022. But this premium has turned into an incredible discount for what may well be the premier name to own in the digital payments space.
Despite a laundry list of economic challenges, including historically high inflation and supply chain disruptions, PayPal's total payment volume (TPV) has continued to grow by a double-digit percentage, excluding currency movements. This is a testament to the growth potential of digital payments, as well as an indication that we're still in the very early innings of fintech expansion.
What's arguably even more important than growing TPV or adding new accounts is ensuring that existing active accounts increase their engagement. In the seven quarters (21 months) since the end of 2020, the average number of transactions completed by active accounts over the trailing-12-month period has jumped 25% to 50.1. PayPal is primarily a fee-driven operating model, meaning greater engagement from existing customers will push its gross profit needle higher.
This is also a company that can stomp the accelerator or hit the brakes as needed. Over the summer, CEO Dan Schulman announced plans to reduce PayPal's annual expenditures by $1.3 billion in 2023. Meanwhile, PayPal deployed $2.7 billion in 2021 to acquire buy now, pay later service Paidy in Japan. PayPal is wisely putting the puzzle pieces together to generate significant long-term growth, while also being mindful of near-term challenges.
At less than 17 times Wall Street's forecast earnings for 2023, PayPal has never been cheaper as a publicly traded company.
Nasdaq 100 stock No. 2 to buy hand over fist: Meta Platforms
The second Nasdaq 100 stock that can confidently be bought hand over fist by patient investors is social media stock Meta Platforms (META 1.54%). Shares of Meta have cratered 71% since hitting an all-time high in September 2021.
The collapse in Meta stock over the past year and change can be tied to two factors. First, Wall Street hasn't been thrilled with CEO Mark Zuckerberg's pricey metaverse investments. Reality Labs, the operating segment that covers metaverse products and services, has lost $9.4 billion through the first nine months of 2022. As of now, Zuckerberg has no intention of ramping down metaverse investments, which are weighing on Meta's free cash flow and net income.
A weakening U.S. economy is the other reason Meta shares have been pummeled. A little over 98% of Meta's revenue derives from advertising. Unfortunately, advertising is one of the first spending categories to fall off when the economy weakens. With advertisers being more mindful of their spending and Meta ramping up its own spending, it's been a double-whammy for the company's bottom line.
However, it's important not to overlook just how dominant Meta's social media assets are. Facebook, WhatsApp, Instagram, and Facebook Messenger are consistently among the world's most-downloaded mobile apps. When September came to a close, Meta's family of apps had 3.71 billion unique monthly active users. We're talking about more than half of the world's adult population visiting at least one Meta-owned social media site each month. There's isn't another social media platform that'll give advertisers more reach than what Meta can offer. This is why, more often than not, Meta can command superior pricing power for ad placement.
The company's metaverse investments are also intriguing -- even if it takes until later in the decade to begin paying off. The metaverse has been pegged as an up-to $30 trillion opportunity in 10 to 15 years, and Meta stands to benefit as an on-ramp to this interaction. With almost $32 billion in net cash in the company's coffers, it has more than enough capital to continue being aggressive without adversely impacting its cash cow of an advertising business.
For a dominant operating model like Meta, a forward-year price-to-earnings ratio of 14 simply doesn't do it justice.
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The Nasdaq 100 stock worth avoiding: Netflix
But not every Nasdaq 100 stock is going to be a winner. Although it's a been wildly profitable stock to own for much of the past two decades, streaming service provider Netflix (NFLX -0.51%) is the Nasdaq 100 stock to avoid like the plague.
To be fair, Netflix wouldn't have achieved mega-cap status if it hadn't done something right. While most companies investing in streaming services are losing hundreds of millions, if not billions, of dollars each year, Netflix has been generating adjusted profits. That's a reflection of Netflix retaining its subscribers, as well as producing a long list of original series and movies.
In terms of streaming services, Netflix is also king. The company ended September with 223.1 million global subscribers. Even though Walt Disney has surpassed Netflix in aggregate subs, it needs to combine Disney+, Hulu, and ESPN+ to do so.
But there are two significant headwinds that make Netflix avoidable, even after a miserable 2022.
First, as Netflix notes in its quarterly letter to shareholders, competitors are investing heavily in streaming services. They may be losing money at the moment, but that's not deterring them in the slightest. For instance, Disney+ has ramped up to 164.2 million subscribers less than three years after launch (November 2019). It took Netflix well over a decade to hit 164.2 million subs. It's no secret that Netflix's slower growth coincides with a period of rapid subscriber increases for its peers. Without sizable subscriber growth, Netflix will be forced to lean on price hikes to move the needle.
The second and arguably bigger issue for Netflix is the company's cash flow. Although Netflix is profitable, it has a history of aggressively spending on international expansion, original content creation, and content acquisition. While this is all necessary for the company to succeed, it's created an unsightly premium for Netflix, relative to its cash flow. At a time when investors are more critical of valuations than at any point over the past decade, Netflix is trading at more than 40 times Wall Street's forecast cash flow for 2023. That's not going to cut it in a bear market.
Until Netflix generates consistently positive cash flow and can reignite subscriber growth, it's worth avoiding.
