From time to time, Wall Street is known to test the resolve of investors. This occurred during the quickest bear market decline in history (the COVID-19 crash), as well as in 2022, which saw the growth-focused Nasdaq Composite (^IXIC 1.59%) lose 33% of its value.
However, time has a way of healing all wounds on Wall Street -- at least when it comes to the major stock indexes. Thus far in 2023, the Nasdaq Composite has rallied 33%, as of the closing bell on Aug. 29. Yet even with this stellar rally, the Nasdaq remains 13% below its November 2021 record-closing high.
Image source: Getty Images.
Whereas some investors would view this 13% decline over the past 21 months and change as a disappointment, long-term investors see it as an opportunity to pounce on game-changing growth stocks at a discount.
What follows are four preeminent growth stocks you'll regret not buying in the wake of the Nasdaq bear market dip.
PayPal Holdings
The first top-tier growth stock that you'll be kicking yourself for not buying following the Nasdaq bear market swoon is fintech leader PayPal Holdings (PYPL 1.41%). Although investors appear concerned with PayPal's modestly lower gross margin and near-term lack of active user growth, the puzzle pieces are in place for the industry's leading digital payment player to thrive over the long run.
NASDAQ: PYPL
Key Data Points
For example, the deck has been stacked against PayPal for much of the past year. A historically high inflation rate in 2022, which carried into 2023, has threatened to reduce discretionary spending for low-earning workers. Yet, in spite of this challenge, PayPal managed 11% growth in total payment volume (TPV) in the second quarter on a currency-neutral basis. If PayPal can deliver double-digit TPV growth when times are tough, imagine how quickly its business will bounce back when the U.S. economy is once again firing on all cylinders?
What's particularly intriguing about PayPal is the growing engagement it has with its 431 million active users. As of the end of June 2023, the average active account completed 54.7 transactions over the trailing-12-month (TTM) period. That's up from an average of 53.1 transactions over the TTM in the sequential first quarter, and 40.9 transactions over the TTM period to close out 2020. This steadily rising engagement is imperative for a fee-driven operating model like PayPal.
Another reason for shareholders to be optimistic is management's capital-return program. The company's board approved up to $15 billion in share repurchases last year. Further, the company is targeting $1.3 billion in aggregate cost cuts in 2023. Together, these actions should help sustain double-digit growth in earnings per share.
A forward price-to-earnings (P/E) ratio of 11 is criminally cheap for a fintech leader like PayPal.
NASDAQ: FSLY
Key Data Points
Fastly
A second preeminent growth stock you'll regret not scooping up with the Nasdaq still well below its all-time high is edge computing company Fastly (FSLY 1.74%). Though Fastly is effectively at a 52-week high, a multitude of catalysts stand ready to push its shares even higher.
The biggest knock against Fastly has long been its ongoing losses. The 2022 bear market was unforgiving to growth companies that were nowhere near profitability and had insufficient plans to control their spending. However, the hiring of Todd Nightingale as CEO changed everything.
Nightingale had been the executive vice president of Cisco Systems' Enterprise Networking and Cloud division before taking the reins at Fastly. In short, he knows where to tighten the belt and when to depress the accelerator. Fastly's forward-looking outlook has continually improved since Nightingale took over one year ago. If things continue to improve, Fastly may be able to eke out a full-year profit next year.
Beyond the addition of a tried-and-true leader in Nightingale, Fastly's biggest catalyst looks to be the rise of artificial intelligence (AI). Fastly is best known for its services as a content delivery network, with its goal to get information to end users as quickly and securely as possible. With more businesses shifting their data and operations into the cloud, and demand for information from end users continuing to grow, Fastly's usage-driven operating model is set to thrive.
Despite losing money, many of Fastly's key performance indicators are headed in the right direction. Average enterprise customer spend has, with few exceptions, been slowly moving higher, while its dollar-based net expansion rate has consistently hovered between 118% and 123% for the past eight quarters. In simpler terms, existing customers are spending anywhere from 18% to 23% more on a year-over-year basis with Fastly. That's a recipe for success.
Image source: Getty Images.
BioMarin Pharmaceutical
The third magnificent growth stock you'll regret not buying following the Nasdaq bear market drop is biotech company BioMarin Pharmaceutical (BMRN +0.91%). Even though healthcare stocks have been largely left in the dust by megacap tech through the first eight months of 2023, select winners in the healthcare space, like BioMarin, have the tools and intangibles to reward patient investors.
Before diving into company specifics, it's worth noting that healthcare stocks are quite defensive. No matter what the U.S. economy or stock market throws at drug companies, demand for their products isn't going to change. Patients who need lifesaving/improving therapies yesterday are going to need them in the future, no matter how well or poorly the U.S. economy is performing. This leads to highly predictable operating cash flow for companies like BioMarin.
The key drug that makes BioMarin tick is Voxzogo. This is a U.S. Food and Drug Administration (FDA)-approved therapy designed to increase linear growth in children aged 5 and older with achondroplasia. Sales are up 273% through the first six months of 2023, with label expansion opportunities giving Voxzogo a chance at more than $1 billion in eventual peak annual sales.
There's also plenty of excitement about Roctavian, which was approved by the FDA as a severe hemophilia A treatment in June 2023. BioMarin is prepping for its U.S. launch and working with public insurance funds in Europe to secure access to its new therapy throughout Europe.
The icing on the cake for investors is that BioMarin strictly deals with ultra-rare diseases. Although there are clear risks in targeting a very small pool of patients, there are also rewards for approved therapies. Ultra-rare disease drugs approved by the FDA don't usually face pushback from insurers on pricing, and they often contend with little or no competition. This should preserve BioMarin's cash flow for a long time to come.
NASDAQ: PANW
Key Data Points
Palo Alto Networks
A fourth preeminent growth stock you'll regret not buying in the wake of the Nasdaq bear market dip is cybersecurity stock Palo Alto Networks (PANW +1.21%). Despite having a premium valuation in an uncertain economic environment, Palo Alto has continually demonstrated that it's worth every penny of its premium.
Similar to BioMarin, what investors get with Palo Alto is cash-flow consistency. With businesses accelerating the pace at which they're moving data online and into the cloud following the COVID-19 pandemic, demand for third-party protection from the likes of Palo Alto have only increased. Regardless of what happens with U.S. economic growth, hackers don't take time off.
On a more company-specific basis, Palo Alto's roughly five-year (and counting) shift toward a software-as-a-service (SaaS) subscription model has really paid off. Although it's still providing physical firewall products, 77% of the company's $6.89 billion in full-year sales in fiscal 2023 (ended July 31) were derived from SaaS subscriptions. That's up from just shy of 62% in fiscal 2018.
Focusing on SaaS subscriptions comes with a number of clear-cut advantages for Palo Alto. For starters, subscriptions retain customers far better than physical security solutions do. Secondly, the margins associated with subscriptions are higher than physical products, and the quarterly revenue recognition tends to be less lumpy. Third, and perhaps most important, an SaaS cybersecurity model that's cloud-based and reliant on AI will be more efficient at recognizing and responding to potential threats than on-premises security solutions.
Lastly, Palo Alto Networks is having incredible success landing the big fish. In fiscal 2023, deals worth at least $10 million and $20 million jumped by 37% and 43%, respectively, from the prior-year period. Though a steady stream of bolt-on acquisitions is helping Palo Alto reach new small- and medium-sized businesses, it's these larger deals that are really making a difference.
