The S&P 500 has been in a bear market since last June. The index is up by 5% since then, and up by about 12% from the low point it touched in early September, but that's well below the 20% (or more) sustained gain required before we can say that it has entered a new bull market. Many growth stocks have languished as rising interest rates drove investors toward more conservative investments.
Bear markets are usually a great time for investors to buy undervalued growth stocks that can outperform the market when bullishness finally returns. I believe that currently unloved Twilio (TWLO -2.82%), Celsius (CELH -0.99%), and Lululemon Athletica (LULU -1.48%) fit the bill as turnaround growth plays for the next bull market.
Image source: Getty Images.
1. Twilio
Twilio's cloud-based platform processes integrated voice calls and text messages for mobile apps. If you've ever used Airbnb's app to contact a host or Lyft's app to message a driver, you've made use of its services. By outsourcing those features to Twilio, developers can save time, scale up their apps to reach more users and focus on improving their apps' core features.
Back in 2020, Twilio forecast that it would grow its organic revenues by at least 30% annually through 2024. But it pulled that long-term guidance in November 2022 as the tough macroeconomic environment led many of its potential clients to rein in their software spending. The declining usage of apps across the crypto, consumer-on-demand, social, retail, and e-commerce verticals also reduced its usage-based fees (which it only charges when users actually access its services).
Twilio's revenue still rose 35% (and 30% organically) in 2022, but analysts anticipate just 13% growth in 2023 and 16% growth in 2024. Its near-term gross margins will also likely be squeezed by higher carrier fees, which are charged by carriers for accessing their networks, and pricing pressure from similar platforms like MessageBird.
All of those near-term challenges caused its stock to plummet nearly 90% from its all-time high. But after that steep decline, Twilio trades at less than 3 times this year's sales. So if the macro headwinds abate and Twilio's growth accelerates again, it could quickly attract a stampede of bulls and trade at much higher valuations again.
2. Celsius
Celsius sells "healthy" energy drinks which are made with natural ingredients like green tea and ginger. Instead of sugar, its drinks provide an energy boost from a blend of caffeine and amino acids. It also claims its drinks have been "clinically proven to accelerate metabolism and burn body fat" when consumed before exercising. That unique approach enabled Celsius to carve out a niche in the energy drink market, which was traditionally dominated by the products of Red Bull and Monster Beverage.
Celsius' revenue surged 140% in 2021 and jumped 108% in 2022. That growth was driven by its domestic and overseas expansion, which was accelerated by a big U.S. distribution partnership with PepsiCo it inked last August. PepsiCo acquired an 8.5% stake in Celsius as part of that deal.
In 2023, analysts expect its revenue to rise another 55% to $1.01 billion as it turns profitable on a full-year basis. Those seem like bright green flags for growth investors, yet Celsius' stock still trades at less than 7 times this year's projected sales and remains 25% below its all-time high. Its low enterprise value of $7 billion could also make it a tempting takeover target for PepsiCo.
Celsius' stock might trade sideways over the next few quarters as investors continue to gravitate toward more conservative investments, but it could quickly catch fire again in a new bull market if it maintains its hypergrowth rates.
3. Lululemon Athletica
Lululemon grew faster than many other apparel retailers over the past several years by focusing on the high-end yoga and athleisure apparel market. It prices its products at a premium to other athletic apparel brands, and it reinforced its brand appeal with free yoga classes and other social events. That positive growth cycle prompted other apparel retailers like Gap and Abercrombie & Fitch to launch their own activewear brands, but those competitors still can't hold a candle to Lululemon.
Many other apparel retailers (including Gap) previously set ambitious long-term growth targets, but missed them by a mile. But that's not the case for Lululemon.
Back in 2019, Lululemon unveiled its "Power of Three" growth plan to double its digital segment revenue, double its men's segment revenue, and quadruple its international segment revenue from fiscal 2018 (which ended in February 2019) within the following five years. It cleared its digital and men's goals ahead of schedule in fiscal 2021, even as it temporarily closed its brick-and-mortar stores during the pandemic, and it expects to report that it achieved its international revenue target as of the end of its fiscal 2022, which ended last month.
Those successes led Lululemon management to launch a new "Power of Three x2" plan last April with the same goals on a new time frame: doubling its digital revenue, doubling its men's revenue, and quadrupling its international revenue from fiscal 2021 to fiscal 2026. Its gross margins will face some near-term pressure from inflation over the next few quarters, but its stock still looks historically cheap at 26 times forward earnings. Therefore, I believe Lululemon could bounce back quickly in a fresh bull market.
