Last year's downturn hit the Nasdaq Composite hard -- much more so than the two other major U.S. indexes. It has roared back this year, but there remain plenty of Nasdaq equities lagging the broader market that could deliver excellent returns over the long run.
Here are three examples: PayPal Holdings (PYPL 2.90%), Etsy (ETSY 0.34%), and Match Group (MTCH 0.63%). All three stocks are well in the red over the past year, but their prospects are highly promising, which makes them solid discount stocks to buy on the dip.
1. PayPal
PayPal is losing its edge due to slowing growth for its top line and users. That's why its shares have lagged the market over the past year. However, PayPal has plenty of redeeming qualities, especially for investors looking beyond the next 12 months, during which the stock could remain volatile. Over the next decade, PayPal should benefit from the fintech industry.
Estimates always vary, but most point to the sector growing rapidly in the coming years. PayPal's position as an indisputable leader in fintech that caters to consumers and businesses is a significant strength. The company has arguably developed a network effect whereby the value of its platform increases with use. Its newest CEO, Alex Chriss, could also help jump-start the company's growth.
Chriss' successful experience in leading some of the largest divisions within Intuit, a financial services company, makes him an excellent candidate to head PayPal.
Despite slower sales growth over the past year and a half, partly due to the economy and the aftereffects of the pandemic, PayPal has performed well when we zoom out. As the company reported at the beginning of the year, its active accounts, total payment volume, and its net revenue registered compound annual growth rates (CAGRs) of 14%, 24%, and 16%, respectively, between 2017 and 2022.
Adjusted earnings per share's CAGR was 17% through that period, while its free cash flow's CAGR was 22%. Investors shouldn't focus solely on the recent past with PayPal, which is abnormal in many ways. Over the long run, the company could still go on to deliver excellent returns.
2. Etsy
Etsy is also dealing with slower revenue growth and decreasing earnings. In the second quarter, the company's top line increased by just 7.5% year over year to $628.9 million, while its net income dropped by 15.3% to $61.9 million.
One of Etsy's problems is that its e-commerce platform is centered around vintage, handmade, and rare goods that tend to have more expensive price points. Nor are they the kinds of goods that consumers will prioritize in a challenging economy.
However, this focus on a specific niche is also Etsy's strength, even though it makes it susceptible to economic cycles. The brand name has become intimately attached to this relatively small corner of the broader and highly competitive e-commerce sector -- the big fish in a small pond. The result is that people know where to turn when looking for these kinds of goods.
And for those who don't, word of mouth (one of the best and most cost-effective forms of advertising) will often lead them right to Etsy's doorstep.
The company has also developed a strong network effect through which buyers and sellers of rare items increasingly go to its platform to find one another. It's difficult to imagine Etsy losing its leading position in the next decade, and in the meantime, the economy will eventually swing back to where it fosters higher spending for vintage goods.
Etsy has estimated its total addressable market to be on the order of $2 trillion, of which it has grabbed just a tiny portion. Even if it won't capture this entire market, its economic moat and long runway for growth could lead to excellent results in the next 10 years.
3. Match Group
Match Group is a leader in online dating with a portfolio of websites and apps, none more important than Tinder. The company's other key platforms include Hinge and its namesake website.
Again, Match Group's problem is slowing revenue and user growth. In the second quarter, total revenue of $830 million was up just 4% year over year while the number of paying users across its platform dropped by 5% year over year to 15.6 million.
Match Group has been looking to address the challenges it has faced. One of the company's goals is to change the perception of Tinder as an app designed just for flings. That's the aim of a recent marketing campaign. Match Group is also giving online daters more options by conjuring up new subscription plans.
The company has sought to strengthen its position in Asia through its subsidiaries in the region. The Asian market, the largest in terms of population, represents a substantial opportunity for online dating companies since the market remains severely underdeveloped.
Meanwhile, like PayPal and Etsy, Match Group also benefits from the network effect, with would-be online daters likely to be attracted to those platforms that already have a large number of potential partners. That's why it should be just fine and could go back to delivering excellent returns soon. Interested investors should take advantage of the recent sell-off to buy the company's shares.
