When putting capital to work, a good starting place is to find stocks that are well off their all-time highs. This presents a potential opportunity as pessimism is elevated -- and the upside could be sizable. Finding businesses that have wonderful qualities, like a competitive advantage and ample growth opportunities, is important as well.
With that framework in mind, here are three beaten-down growth stocks that investors should take a look at buying right now. They just might supercharge your portfolio's returns.
1. Etsy
As of this writing, Etsy's (ETSY 0.34%) stock is down 69% from its peak price. The business is enduring a huge post-pandemic hangover, one where growth in revenue and gross merchandise sales (GMS) has slowed dramatically. Fewer consumers need to flock to the website for face masks and other essentials they might have needed years ago.
But shareholders shouldn't panic just yet. Etsy's user base, measured by active sellers of 7.9 million and active buyers of 95.5 million, increased on a year-over-year basis. That's a clear sign that customers still see value in the marketplace.
By only just connecting buyers and sellers on its tech platform, Etsy is a unique operation in that it doesn't own any inventory itself. This frees up capital. And it helps explain why the business has generally been so profitable.
In 2022, Etsy's GMS totaled $13.3 billion. Management thinks this is a drop in the bucket compared to the company's total addressable market. If we look at Etsy's seven core markets, which include the U.S., Canada, the U.K., France, Germany, Australia, and India, the GMS opportunity is $466 billion. This counts online shopping for the product categories that Etsy specializes in. That means there's a huge growth runway as we look ahead.
2. PayPal
PayPal (PYPL 2.90%) is very different from many of the fintech stocks that you're probably familiar with in that the digital payments giant is incredibly profitable. Yet the stock has taken a beating. It's down 80% from its all-time high back in July 2021. Shares now trade at a price-to-earnings ratio of 27, below its historical average of 50, a rare buying opportunity indeed.
Like Etsy, PayPal is seeing slower growth, which makes sense given how consumer shopping behavior is reverting to normal, with e-commerce activity not as popular as it was during the depths of the pandemic. Moreover, persistently high levels of inflation hurt PayPal because its network leans more toward discretionary purchases -- things consumers will delay buying when times are tough.
But PayPal has proven to be a cash register. In 2022, it generated $5.1 billion of free cash flow on $27.5 billion of revenue, allowing management to continue buying back sizable amounts of outstanding shares. The company will be able to handle a possible prolonged economic downturn thanks to its strong financial footing.
Growth prospects are also stellar, with Wall Street analysts forecasting revenue and diluted earnings per share rising at compound annual rates of 10.7% and 28.2%, respectively, over the next five years.
3. Roku
Since hitting an all-time high in July 2021, Roku's (ROKU -10.29%) stock is down a jaw-dropping 85%. And it now trades at a compelling price-to-sales ratio of 3.2. That's a low valuation for a business that has so much potential. To be fair, Roku's revenue growth of 1% in the first three months of 2023 was a sharp deceleration from past quarters.
Most investors are aware that the streaming industry is one of the most competitive around. Deep-pocketed businesses, like Netflix and Walt Disney, as well as smaller rivals, are all spending billions on content to attract viewers. Roku benefits from all of this because it tries to be an agnostic platform that grows as the whole industry grows.
"I've said it before, and I'd say it with pride, Roku is not in the streaming wars, "said Charlie Collier, president of Roku Media, during the company's first-quarter 2023 conference call. "The streaming wars are being played out on our platform."
The management team sees streaming entertainment continuing to gain ground versus regular cable TV. And with this ongoing shift in consumer behavior, advertising dollars should follow. According to eMarketer, the connected-TV ad industry in the U.S. is slated to roughly double from $21 billion in 2022 to $41 billion in 2027. And Roku is well-positioned to ride this wave.
