Though the three major U.S. stock market indexes are up as much as 10% over the past year, the stocks mentioned in this article haven't joined the crowd. Down by between 23% and 78% in the past 12 months, these former growth stock darlings now face slowing growth and lower share prices.
However, considering their now-discounted valuations, it's time to revisit their unique operations.
1. PayPal
Shares of PayPal (PYPL -1.83%) have dropped by more than 15% since it released its first-quarter earnings report in early May, continuing the march downward they began after peaking in 2021.
In light of its disappointing forecast for 7% revenue growth in the second quarter, investors continued to bid down the payments behemoth as its days as a high-flying growth stock receded further into the rear-view mirror. It's now down almost 80% from its peak.
So what makes PayPal interesting right now?
First, its discounted valuation suggests that this sell-off may have been overdone. Trading at a price-to-free-cash-flow ratio of just 16 -- even after removing stock-based compensation from free cash flow -- PayPal generates a robust 6% free-cash-flow yield at today's prices.
Sporting a 14% free-cash-flow margin (again, after factoring out stock-based compensation), the company's cash generation allows for steady share buybacks, which could benefit shareholders at these prices.
Furthermore, Kantar BrandZ ranked PayPal as the 28th most valuable brand in 2022, just ahead of Netflix and Tesla. This is exciting because, dating back to 2006, companies in the report have outpaced the S&P 500 Index.
This combination of discounted valuation, a powerful brand, and excess free-cash-flow generation for buybacks and prospective acquisitions suggest that PayPal may be a classic example of a great business trading at an appealing price.
2. Match Group
Match Group (MTCH -0.19%) continues to maintain its leadership position in the dating app industry -- its portfolio of services accounted for 63% of the industry's $4.9 billion in revenue last year. However, its recent stock price performance could leave you thinking otherwise, with shares down 82% from their 2021 high.
While its popular Tinder app generated 57% of total revenue in its latest quarter, Match Group also owns rapidly growing Hinge and a wide range of international and "evergreen and emerging" apps. This broad suite of dating services allows the company to innovate and experiment, and then bring its best-in-class ideas to additional markets.
Although the company's revenue declined by 1% in Q1, Hinge saw stellar 27% growth as its European expansion was a smashing success. Best yet, management is forecasting $800 million in free-cash-flow generation in 2023, and has pledged to use half of its free cash flow each year for share buybacks for the indefinite future.
Trading at just 11 times expected free cash flow, Match Group's leadership position and history of innovation make it way too cheap to ignore at today's prices, especially as it eyes new international markets.
3. Olaplex
After dropping from its initial public offering price of $25 to its current mark of just above $3, Olaplex (OLPX 4.65%) is a speculative investment. A single-digit share price can serve as a death knell for many upstart stocks -- but there are still reasons to be intrigued by this young hair care company.
Treating, maintaining, and protecting its customers' hair, Olaplex has over 160 worldwide patents. Through these patents and its bond-building technology, the company has built a best-in-class reputation for premium hair care, allowing for an average net profit margin of more than 30% in recent years.
However, in Q1, it reported a drop in sales of nearly 39%. Despite this stunning reversal, Olaplex eked out an 18% net profit margin in the quarter and will heavily invest in marketing throughout 2023 to clear out excess inventory.
Data source: YCharts OLPX Revenue (Quarterly YoY Growth)
Perhaps most importantly, the company effectively converts its revenue into free cash flow and trades at a minuscule price-to-free-cash-flow ratio of 10. While investing in it is a risky proposition, Olaplex's risk-reward ratio is alluring, as its high profit margin and premium branding give it multibagger potential.
4. Lovesac
Also down over 70% from its all-time high in 2021, Lovesac (LOVE 0.84%) -- seller of easily rearrangeable "sactional" sofas -- now trades at a low price-to-earnings ratio of 13.
Data source: YCharts LOVE PE Ratio
Using an asset-light operating model that emphasizes e-commerce sales, shop-in-shops, pop-up shops, kiosks, and smaller showrooms, Lovesac offers endless customization, despite its minimalist SKU count. Built in part using materials from recycled plastic bottles, the company's offerings resonate with environmentally focused consumers and command premium prices.
Furthermore, its newly patented StealthTech Sound and Charge innovations allow for hidden, built-in surround sound and electronics charging capabilities. Reverse compatible, these accessories can be put into any previously sold Sactional models, adding upside to the lifetime value of Lovesac's existing and future customers.
It currently holds just a 1% share of the $46 billion seating and home audio market, but with its 22% sales growth in Q4 and its improving margin profile, Lovesac should be on investors' radars, particularly in light of its low valuation.
5. SoFi Technologies
Sofi Technologies (SOFI -0.42%) is also down by more than 80% from its peak, and the stock remains under pressure amid the regional banking drama.
Its single-digit share price may make it look like it is in deep trouble. However, the company's burgeoning financial services unit added $2.7 billion in deposits during its most recent quarter, bringing its total to over $10 billion.
These deposits are crucial to SoFi as they allow it to fund its lending segment with low-cost capital provided by sticky and recurring direct deposits. Using these funds, the company can capitalize on loan demand across its three segments -- personal, student, and home -- regardless of which line is booming.
For example, after interest rates ballooned in 2022, SoFi's personal loan originations jumped by nearly 50% year over year in Q1 2023. Now economists forecast the Fed may hold the benchmark federal funds rate steady for a while -- or perhaps even trim it -- meaning SoFi's nascent mortgage unit could benefit as lower rates would encourage sales and refinancing.
Meanwhile, its student loan unit could see renewed activity as student loan payments -- put on hiatus by the federal government during the pandemic -- are scheduled to resume on June 30.
Wherever interest rates go, the company's balance across its lending segment makes its tiny price-to-sales ratio of 2.7 very interesting. Furthermore, management is aiming for profitability by Q4 2023, and SoFi's blistering 43% revenue growth in Q1 shows this discounted growth stock could offer multibagger potential.
