Growth stocks had a bad year in 2022, suffering severe share price drops amid the inflation-powered economic crisis. Many of these stocks are coming back strong this year -- but a few stubborn laggards continue to trend downward.
Inquiring minds want to know if July is an excellent time to give the market's worst-performing growth stocks a second chance. Let's take a look.
And in the blue corner...
I'm working with a very tight definition of growth stocks for this investigation. Only 41 stocks have delivered at least 15% compound annual growth rates (CAGR) on both the top and bottom lines over the last five years, while your average analyst also expects the 15% earnings growth to continue for another five years.
In this group of elite business growers, 26 stocks have delivered positive share price moves year to date, including a few absolutely stellar jumps. Crypto-mining specialist Marathon Digital Holdings leads the pack with a 360% gain in 2023, making up for about half of the 89.6% plunge Marathon saw last year.
But I'm here to look at the other end of that spectrum. Here are the five deepest year-to-date price drops among the 41 high-octane growth stocks I found with the help of Finviz.com:
- Chegg (CHGG 3.20%), down 64% in 2023: An American education technology company that provides digital and physical textbook rentals.
- JD.com (JD 6.12%), down 36%: One of China's largest e-commerce companies, with a tight focus on direct-to-consumer sales.
- Enphase Energy (ENPH 3.80%), down 36%: A global energy technology company that designs and manufactures software-driven home energy solutions. The company focuses on residential customers, offering a range of systems for solar power management and electric vehicle charging.
- Etsy (ETSY 0.34%), down 29%: An American e-commerce website focused on handmade or vintage items and craft supplies.
- Amyris (AMRS -33.33%), down 29%: A leader in the development and production of sustainable ingredients for the health, wellness, and clean beauty markets. Amyris works mainly under the brand names of Biossance and Pipette for health and beauty products, alongside the Purecane zero-calorie sweetener.
Suspect sluggers
Some of these low-priced stocks don't thrill me.
Amyris is a volatile micro-cap stock with a promising but unpredictable business plan. What started as an innovative biofuels company in 2003 shifted into an entirely different consumer products operation a decade ago, to mixed results. This stock soared in 2021 due to promising results from its gene-edited, yeast-based ingredients, but those golden days are a fading memory now. Trailing sales are down by 22% over the last two years and share prices fell 93% over the same period. I'm not convinced that Amyris' stock is poised for a strong recovery anytime soon.
Online learning expert Chegg also looks more troubled than tempting. The company's e-learning services face a game-changing challenge from the rise of artificial intelligence tools like OpenAI's ChatGPT. I'm not speculating here -- Chegg CEO Dan Rosensweig said so himself in May's first-quarter earnings call.
"In the first part of the year, we saw no noticeable impact from ChatGPT on our new account growth and we were meeting expectations on new sign-ups," Rosensweig said. "However, since March, we saw a significant spike in student interest in ChatGPT. We now believe it's having an impact on our new customer growth rate."
In response, Chegg partnered up with OpenAI to create CheggMate, which combines the user-friendly knowledge-seeking system of ChatGPT with Chegg's proprietary data and training methods. So Chegg isn't taking this challenge sitting down, but its business results are already under pressure. I'd rather watch this drama from Wall Street's sidelines for the time being.
Promising pugilists
But it's not all bad news. In fact, I expect solid stock gains from the other three low-priced growth stocks on this list.
Enphase actually soared in 2022, against the headwinds of a global economic crisis, and the stock looked pretty expensive by the end of the year. At the start of 2023, the power management expert traded at 70 times free cash flow (FCF) and 126 times adjusted earnings. That's standard fare for many growth stocks in a normal economy, but rarefied air in that risk-averse environment. Today, Enphase's stock has retreated to more affordable valuation ratios such as 30 times FCF and 50 times earnings. Given the company's massive business growth, I'm tempted to grab a few shares myself at lower prices:
ENPH Revenue (TTM) data by YCharts
JD's top-line sales have slowed down recently, but the company is also squeezing more profit out of each incoming revenue dollar. Meanwhile, Chinese regulators have relaxed their strict COVID-19 mitigation policies, which gave JD's massive distribution network a new lease on life. This is a pandemic turnaround story with sound long-term growth prospects. JD shares are changing hands at 10 times FCF and 10.5 times forward earnings and that looks like a bargain right now.
Finally, Etsy might be the tastiest tidbit of them all. Its trailing sales have increased by 134% in three short years while FCF jumped 77% higher. The stock took a huge hit from the risk-averse market tenor of 2022 and has fallen a total of 61% since the end of 2021, but Etsy's long-term business prospects look as bright as ever. Personalized e-commerce is here to stay and this all-American company has barely started to explore international markets yet. Etsy is a solid buy in my book.
So there you have it: the market-lagging growth stocks of 2023 are a mixed bag. You can't paint this corner of the stock market with a broad brush, as every company and stock is a different story. I'd love to buy Etsy, JD, and Enphase at these discounted stock prices but it takes more than plunging chart lines to make me consider Chegg or Amyris.
