Hang in there, folks. In about a week and a half, we get to close the door on the worst year that just about any of us can remember. It's been such a lousy year that the Vanguard Growth ETF has tumbled a stunning 35% from the high-water mark it set in January.
Some tax-loss selling could apply more downward pressure on growth stocks in the final trading days of the year. If so, it would just create an even better opportunity to scoop up shares of some underappreciated names that appear poised to come roaring back in 2023.
These two growth stocks excited investors during the early days of the pandemic, but both have fallen 78% or more from their peaks. Here's why investors can look forward to strong recoveries from them in 2023.
1. Roku
Macroeconomic jitters have caused advertisers to tighten their belts this year, and it hasn't been easy on Roku (ROKU 0.50%). Shares of the streaming giant have collapsed an unimaginable 91% from the peak they reached during the lockdown phase of the pandemic.
Roku's stock price is down sharply even though its audience of viewers is still growing. In the third quarter, the company added 2.3 million accounts. But investors had a hard time seeing past revenue that keeps decelerating. From the second quarter of 2022 to the third, Roku's total revenue fell by $3 million.
Management blamed the revenue contraction on overall weakness in the market for television ads. If the market for TV ads improves next year, Roku's stock price could come screaming back. The company's operating system for televisions delivers more hours of streaming video than any other.
Roku could recover in 2023, but investors should understand that the company lost $237 million this year. If management can't find a way to make ends meet soon, the stock could fall even further than it already has. It's probably best to wait for signs Roku can return to profitability in upcoming quarters before risking any of your hard-earned money on its recovery.
2. PayPal
Shares of PayPal Holdings (PYPL 0.75%) have collapsed a stunning 78% from their peak in 2021. Soaring demand for online payment solutions sent this stock screaming higher during the lockdown phase of the pandemic. Unfortunately for PayPal, it's a lot easier to pay each other in person these days.
The company is dealing with a tough season for comparisons, but it still managed to report third-quarter revenue that rose 11% year over year. Also, we aren't seeing serious signs of lower consumer spending in PayPal's results. Overall payment volumes in the third quarter rose 14% year over year if you ignore the effects of the strengthening dollar.
In 2020, PayPal bought Honey, a service that connects consumers with coupons from thousands of participating merchants. Using incentives funded by its partners to increase customer engagement is boosting profits. The company reported an impressive $1.8 billion in free cash flow during the third quarter, a 37% gain year over year.
Fear of a recession that could pressure consumer spending even further is darkening the stock market's view of PayPal. Right now, you can buy the stock for just 16.5 times forward-looking earnings estimates. At this valuation, investors will come out ahead over the long run if the company simply keeps plodding forward at a single-digit percentage.
PYPL free cash flow; data by YCharts.
I think the market is far too pessimistic about PayPal. Profits aren't bounding upward in a straight line, but they're rapidly moving in the right direction despite less-than-favorable economic conditions. Buying the stock now and holding it through the next bull market or longer looks like the right move.
