The past two months have not been kind to the stock market, especially technology stocks. Even worse have been technology stocks with exposure to China, or at least U.S.-China tensions.
Still, that may have opened up opportunities in otherwise high-quality companies with both promising competitive positions and growth runways. That's why the following two beaten-down growth stocks look like juicy opportunities after the market's summer pullback.
ASML Holdings
ASML Holdings (ASML 2.04%) has had a rough couple of months. Since reaching its mid-July pre-earnings high of almost $772 per share, shares have now retreated nearly 25% to $587 as of this writing. After booming on AI-related enthusiasm, the world's dominant lithography provider is now barely positive on the year.
ASML's pullback has been due to a combination of factors. First, long-term interest rates have gone up, which tends to decrease the net present value of far-off future earnings, thus affecting growths tocks. While ASML has a monopoly on crucial extreme ultraviolet (EUV) technology, it did trade at somewhat of a high multiple earlier this year.
However, ASML's P/E ratio is now under 30, at the lower end of its range since it first began selling EUV machines back in 2016.
ASML PE Ratio data by YCharts
Besides the rise in rates, most semiconductor manufacturing equipment stocks sold off hard after China's Huawei released its Mate 60 phone this month. That phone was shown to have a 7nm processor -- the kind that China was not supposed to be able to make.
ASML was already prohibited from selling EUV machines to China, so it's likely that China chipmakers were able to make a 7nm chip with less efficient double patterning using higher-end deep ultraviolet (DUV) machines. So there may be fears that ASML will be further prohibited from selling even more machines to China, which accounted for 20% of its backlog last quarter.
However, further restrictions on high-end DUV machines were already known to investors. On the Q2 conference call with analysts, management noted that in light of new Dutch export rules that came out Sept. 1 but were already known to the company, ASML would have to apply for export licenses for its most advanced DUV machines. Still, management didn't expect the restriction to have a material impact on 2023 or the company's longer-term financial outlook it disclosed last November. Management also noted that a lot of China sales come from midrange to mature nodes that shouldn't be affected by the latest restrictions.
If ASML's long-term targets remain unchanged, this looks like a good entry point for the stock. ASML has no competition for EUV, which will be necessary to produce leading-edge logic and DRAM memory chips, both of which will be necessary to build artificial intelligence systems.
Sea Limited
Southeast Asian superapp Sea Limited (SE 0.05%) has seen a much worse year, down 24% for 2023 thus far.
The company sold off hard after reporting earnings, in which profits beat expectations but revenue fell a little short. Of note, Sea Limited has impressively pivoted over the past 18 months to a profit-making company, rather than its prior loss-making growth-at-all-costs strategy.
Investors didn't like the fact that management said it would be repivoting back to growth mode, albeit in a "sustainable" way that will no longer burn lots of cash.
But last quarter's revenue "miss" was a bit misleading, as Sea Limited began to offer shipping subsidies again with an aim to reignite growth in its Shopee e-commerce division. Given that Sea's logistics arm earns low-margin revenue, the discounts offered to customers amounted to a reduction in shipping revenue, not an increase in costs.
So that made it seem as if demand was falling short of expectations, but it was really a shipping subsidy. Shipping revenue increased only 11% last quarter. But the core marketplace, which includes more profitable take rate and advertising revenue, grew a much healthier 38%.
Investors appear to be extrapolating a much tougher competitive environment in light of TikTok Shop's recent entrance into the market, which has been taking market share recently. However, TikTok has been aggressively subsidizing sales to gain market share. And despite TikTok's inroads, Shopee still dominates Southeast Asian e-commerce with roughly 48% market share in 2022, according to Momentum Works. That's far ahead of second-place Lazada, backed by Alibaba at 20% and TikTok Shop at 4.4% at the end of last year.
Moreover, Sea has been in profit-harvesting mode. But given that Sea started as a mobile-first and social-first e-commerce site with its own video game wing, it should be able to fight back effectively in live-streaming video e-commerce. That's especially true as it's currently the only e-commerce platform in the region to have become profitable at scale. On the August earnings call, Sea's management already noted that its recent live streaming events for the 7.7 and 8.8 campaigns this quarter received a huge amount of traffic compared with a normal day.
In addition, just yesterday, the Indonesian government announced it may release regulations to more clearly separate e-commerce and social media, citing predatory pricing by new social media commerce sites. That probably means TikTok, given its recent increase in market share. Given that Indonesia has the largest Southeast Asian economy, that could put a stop to the TikTok threat. As a result, Sea surged yesterday, but shares are still well below their prior levels.
With proven profitability across all three of its e-commerce, fintech, and gaming businesses giving it resources to compete, along with a strong outlook for Southeast Asian economies, Sea should be able to see profitable growth over the long-term. That's why long-term investors should take advantage of the recent panic and scoop up shares at their current discount.
