In today's market, it's not hard to find growth stocks that trade down massively from their highs. High levels of inflation have prompted the Federal Reserve to rapidly increase interest rates. And even with signs that inflation may be moderating, investors now have the possibility of a prolonged recession to contend with. This unfavorable backdrop of macroeconomic conditions has generally crushed valuations for growth-dependent companies.
But there is a silver lining. Hard times will eventually give way to brighter days, and there are currently some very promising companies trading at prices that open the door for massive long-term gains. If you're on the hunt for potentially explosive investment play, then consider Cloudflare (NET 23.53%) and Fiverr International (FVRR 2.51%) as two growth stocks down more than 75% that are worth buying and owning for the long haul.
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1. Cloudflare
While many software companies have seen growth slow dramatically, Cloudflare has continued to post very strong rates of sales expansion. After growing revenue 52% annually in 2021, the web services provider will likely show annual growth in the range of 48.5% when it publishes its final quarterly report for 2022 next month.
Despite posting relatively strong momentum, the company's valuation has been crushed amid the broader pullback for growth stocks. As of this writing, Cloudflare's share price trades 77% off its high.
NYSE: NET
Key Data Points
For long-term investors, the good news is that Cloudflare's large customers will have a very hard time cutting back on its services, even if economic conditions generally cause purse strings to tighten. The company's technologies for protection against distributed-denial-of-service (DDoS) attacks help ensure that websites and services can't be easily taken offline. Its content-delivery-network (CDN) services speed up the rate at which information can be sent and accessed around the world. Having a strong digital presence has never been more essential for business success, and it will only become increasingly important going forward.
Through landing new customers and attracting increased spending from those already using its services, Cloudflare managed to increase its count of large customers generating more than $100,000 in annual sales at a 61% compound annual growth rate over the last two years. Large customers accounted for 61% of the company's $253.9 million in third-quarter revenue, and the business is positioned to enjoy sustained demand tailwinds in conjunction with the growth of internet-based commerce and communications.
For long-term investors looking for beaten-down growth stocks with the potential to deliver big wins, Cloudflare is a category-leading company that could deliver incredible performance.
2. Fiverr International
Fiverr International's gig-labor marketplace saw surging engagement amid multiple pandemic-related tailwinds, but growth has slowed substantially as these demand catalysts have receded. After managing to grow annual revenue 77% in 2020 and 57% in 2021, there has since been a dramatic deceleration, and it has reshaped how the market views the stock.
The third quarter saw the company's revenue climb roughly 11% year over year to reach $82.5 million, and the market has punished the stock for the big slowdown that's occurred over the last year. The company's share price is down 89% from its high.
NYSE: FVRR
Key Data Points
Fiverr's growth engine revolves around attracting new labor buyers to its platform and increasing spending from those using its services. While the company has managed to continue attracting new customers -- it ended the third quarter with 4.2 million active buyers on the platform -- this was up just 3% compared to the prior-year period. Average spending per buyer looked a bit more encouraging, climbing 12% compared to the second quarter in 2021.
But crucially, the company has shown relatively strong pricing power. It managed to increase the fee that it takes on each transaction conducted through its platform from 28.4% in Q3 2021 to 30% in last year's third quarter. The company's roughly 81% gross margin in Q3 2022 also suggests strong earnings growth potential as the business continues to scale.
While many investors have given up on the stock, Fiverr still has solid business foundations and the potential to deliver strong returns for long-term shareholders. The company is positioned to play an important role in the growth of the gig economy, and its valuation has been pushed down to levels that leave room for big upside.
FVRR PS Ratio (Forward) data by YCharts
Fiverr currently has a market cap of roughly $1.3 billion and is valued at approximately 3.5 times expected forward sales. The company is also posting profits on an adjusted basis and is valued at roughly 34 times anticipated forward earnings. For long-term investors, this is a beaten-down stock that could deliver multibagger returns.
