Many growth stocks have come under pressure this year due to worsening macroeconomic conditions. Investors are concerned about inflation and a slowdown in the economy. Two stocks that have been struggling for several years are Medtronic (MDT 0.62%) and PayPal (PYPL 2.90%). Their performances have been so bad that their share prices are trading around the levels they were six years ago. What's behind their struggles, and are these stocks worth picking up right now?
1. Medtronic
Medtronic is a huge medical device company that has operations in more than 150 countries. Its products are used to help treat more than 70 medical conditions. But despite having a strong presence in the healthcare industry, the stock has struggled mightily. Since 2021, shares of Medtronic have fallen 38%. Today, the stock is trading at about $73 per share, which is about the same as in late 2016.
The pandemic disrupted supply chains and the company's operations in China due to lockdowns. And Medtronic's exposure to China is also a bit concerning because the company expects that by the end of the current fiscal year, as much as 80% of its portfolio there will be discounted due to the country's volume-based procurement, in which it buys in bulk in exchange for lower prices. That's up from around half of its portfolio in China that faces significant discounts today.
But despite the headwinds Medtronic is facing, the business isn't expecting a huge drop-off in earnings. This year, it is projecting its organic revenue will grow at a rate of 4.5%. And its adjusted earnings per share (EPS) will be within a range of $5.08 to $5.16. That's down from the $5.29 in adjusted EPS it posted in its most recent fiscal year (which ended in April), but it's not a huge decline.
There are still reasons to remain bullish on Medtronic. The company has generated $4.4 billion in free cash flow during the trailing 12 months and its profit margin remains strong at about 11% of revenue. Medtronic's stock is trading at 14 times its estimated future profits, and while it does come with a bit of risk, it could be an underrated investment to consider buying and holding. It is a leading company in medical devices, and that can lead to strong, persistent growth in the long haul.
2. PayPal
Fintech PayPal has performed even worse than Medtronic in recent years. Since 2021, its shares have plummeted 77%. E-commerce platform eBay, which once was partners with PayPal, no longer allows sellers to use PayPal to process payments. That's a huge blow to PayPal, and with more payment options out there from Apple and other companies, competition is also heating up. There's plenty of bearishness surrounding the business right now. At about $53, PayPal shares haven't been this low since mid-2017.
On top of those headwinds, Chief Executive Officer Dan Schulman is retiring, creating more uncertainty around the business and the direction it will be heading in. Plus, inflation and challenging economic conditions have raised concerns about discretionary spending and how much activity there will be on PayPal's platform.
But despite the challenges, this is a company that is still doing well. In its most recent earnings report, revenue rose 7% from a year earlier to $7.3 billion, and PayPal also posted a $1 billion profit (versus a loss of $341 million a year ago). The company also brings in about $5 billion in free cash flow annually. And PayPal is still a big name in online payment processing. According to Digital Commerce 360, more than 80% of the top online retailers it ranks accept PayPal as a form of payment.
PayPal is a struggling stock that could surprise investors who are willing to take a chance on it. At less than 10 times its estimated future profits, it looks like a potential bargain.
