It's been a rough 18 months or so for many growth stocks. After surging in value during the earlier stages of the COVID-19 pandemic, growth stocks have seen investors jump ship as increasing interest rates, inflation not seen in decades, and the threat of a looming recession have increased the appeal of more stable, defensive stocks.
This recent drop in growth stock prices gives investors a chance to invest in great companies at much more reasonable valuations than in previous years. If time is on your side, here are two beaten-down growth stocks to buy and hold for the next 10 years.
1. PayPal
PayPal (PYPL 1.28%) is down 75% from its July 2021 high, bringing it to price levels investors haven't seen since 2017. Yet, under the hood, PayPal's business has been headed in the right direction. PayPal's Braintree, a full stack payment processing platform for large businesses, has been a positive sign for the company lately and should continue to be a driver of its growth.
The company's transactions per active account (TPA) in 2022 increased 13% year over year to 51.4, mainly driven by Braintree transaction growth. TPA is important because PayPal's core revenue source is transaction fees. More transactions -- especially from large customers -- equals more money-making opportunities. PayPal says Braintree is largely responsible for its 5% year-over-year transaction revenue growth.
PayPal had $288 billion in payment volume in 2015, $712 billion in 2019, and finished last year with $1.36 trillion -- a compound annual growth rate (CAGR) of 24%. That slightly outpaced its revenue CAGR over that span (16%), but free cash flow has increased at a similar pace (22%).
DATA BY YCharts
Much has been made of PayPal's impressive $5.1 billion in free cash flow in 2022, but for good reason. PayPal says it will use roughly 75% of its FCF to repurchase shares this year. From a technical investing standpoint, share buybacks can be good for investors because they boost the company's earnings per share by lowering the number of outstanding shares.
From an optics standpoint, the share buyback plans should reassure investors of the confidence PayPal's management has in the company's direction. Sometimes the optics are just optics, but in this case, I believe PayPal knows the market is currently undervaluing it and wants to take advantage.
2. Snowflake
Snowflake (SNOW 1.06%) is a powerful data warehousing platform and analytics tool that allows customers to combine and analyze cloud data from Amazon Web Services, Alphabet's Google Cloud, Microsoft's Azure, and other companies' cloud services. Less than three months after its September 2020 IPO, Snowflake's stock was up over 61%. It's now down 42% from its IPO price.
The stock price movements haven't been ideal for initial investors, but the company's business growth should be reassuring. Snowflake increased its revenue to $2.06 billion in its 2023 fiscal year, up from $1.21 billion in 2022.
Its 7,828 customer count as of March 1, 2023 was up 31% year over year, but more impressive, in my opinion, is the growth of its large customers (companies spending over $1 million annually).
Image source: Snowflake.
Snowflake also managed an impressive 158% dollar-based net revenue retention rate, meaning customers are spending 58% more each year with the company. This is a good sign that Snowflake's product and service offerings are expanding, and customers are buying into its ecosystem.
I'd imagine most Snowflake shareholders invest in the company because they believe in its offerings, but there are definitely investors who like Snowflake simply because they like the data industry and its growth potential. Snowflake predicts a $248 billion market opportunity by the end of 2026 in the following areas:
- Data warehouse, data lake, Unistore: $173 billion
- Data science and ML, applications: $51 billion
- Collaboration, data engineering: $14 billion
- Cybersecurity: $10 billion
If the company can successfully tap into the market opportunity (which it's equipped to do), it'll be in a great position. Things may get slightly worse before they get better with Snowflake's stock price, but the long-term value is there for investors. Snowflake also plans to repurchase $2 billion worth of shares this year, which is likely the right move given what the company has been trading for recently.
