While the S&P 500 has recouped most of its losses since entering a bear market in June 2022, the economy still faces significant challenges in the form of inflation, record increases in interest rates, and now possibly even deflation. Combining these factors means we are far from being out of the reach of another bear market, but there is a silver lining.
Economic downturns can dampen growth prospects in the near term, but they create valuable opportunities for investors with time on their side to grab stocks with long-term potential at discounted prices. Based on the stock market's current position and if things should take a turn for the worse, there are three growth stocks investors should consider snagging to bolster their portfolios.
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The leader of crypto
While battling its own bear market, the cryptocurrency industry has fallen out of headlines and lost much of the attention it garnered when it hit all-time highs in the fall of 2021. Despite dwindling prices, the asset class is still burgeoning, and one company is positioned to capitalize on its continued evolution -- Coinbase Global (COIN 5.68%).
Since debuting on the Nasdaq in the spring of 2021, Coinbase shares have primarily been in freefall, down nearly 80% as of this writing from their all-time high. The reason why has to do with Coinbase's profits taking a severe hit, falling by more than 160% and at one point posting a $1 billion loss in Q2 2022. But this is a different company than it was just a year ago.
To reduce its dependence on transaction fees, Coinbase created an innovative suite of new revenue-producing streams like subscription products, institutional offerings, and even its very own blockchain, known as Base. At one point, making up 95% of total revenue, transaction fees only comprise 50% today, helping the company to inch closer to profitability despite turbulent market conditions.
Adding to its battle to turn a profit are efforts to reduce costs. Based on the most recent earnings report, operating expenses are down 58% year over year, mainly due to a reduced staff, leading to other cost-saving benefits like lower real estate costs and streamlined workflows.
Coinbase posted a loss of $97 million in Q2, but the company is much more financially secure than it was in recent memoty. With two consecutive quarters of positive adjusted EBITDA and a robust financial foundation of $5.2 billion in cash, Coinbase seems to have made it through the worst of the crypto winter and will be a prime beneficiary of the industry's growing adoption even if stocks enter a bear market.
The future of EVs
We can't discuss long-term growth without mentioning the electric vehicle (EV) industry's champion, Tesla (TSLA -1.11%). Although Tesla has treated investors particularly well, there is plenty of reason to believe it will continue to do so for years due to two main factors: artificial intelligence (AI) and a strong cash position.
Targeted for completion by the end of the year, the unveiling of fully autonomous driving powered by Tesla's AI supercomputer Dojo means the company's true potential might only be in its infancy. With full self-driving capabilities, CEO Elon Musk envisions the creation of a Tesla robotaxi service that would attract "quasi-infinite demand" and stands as the company's biggest priority.
While fully autonomous driving has yet to be unveiled, Tesla is suited particularly well to handle any market fluctuations in the meantime. Musk summed it up best on a recent earnings call when highlighting that Tesla has "free cash flow in one of the most capital-intensive industries while investing massive amounts of money in new technology," calling it a "ridiculous" accomplishment.
This strong cash position will enable Tesla to weather less-than-ideal economic conditions and continue to invest in research and development efforts, one of the main ways it stays ahead of the competition.
Recognition of Tesla's achievement as the only profitable pure-EV maker, the prospect of autonomous driving looming, and the company's solid financial position make it a no-brainer for investors to pick up in a downturn.
Down, but not out
It's been tough going for PayPal (PYPL 2.90%). Shares have plummeted since hitting an all-time high of $308 in July 2021, trading at about $60 as of this writing. This is almost solely attributed to tighter economic conditions for the average consumer and PayPal's reliance on their spending.
Despite unfavorable circumstances, PayPal remains profitable with a sound business model. In Q2 2023, it posted a profit of more than $1 billion and grew net revenue 7% year over year to $7.3 billion. Although its performance heavily correlates to economic conditions and consumer spending, history shows these matters are typically cyclical.
In preparation for the day that economic conditions improve, investors would be remiss to glance over the fact that PayPal is a clear-cut leader in the payment solutions industry. According to DigitalCommerce360, over 80% of the top 1,000 retailers in the world still offer PayPal as a payment option.
In addition, operating one of the largest online payment networks gives PayPal a distinct advantage as developments in online shopping continue to grow. Retail e-commerce sales are expected to grow at a compound annual growth rate of 7.6% over the coming years, based on a study from Precedence Research, and PayPal is well positioned to capitalize on this positive trend.
The play on PayPal is simple. The company will undoubtedly face challenges in a bear market as consumer spending dwindles. However, if and when economic conditions improve, it will significantly benefit from its existing widespread use and acceptance.
