With only one month remaining in 2023, it's fair to say that it's generally been a pretty good year for the stock market. The S&P 500 has rallied 18.5%, while the more growth-oriented Nasdaq Composite index has soared 36%.
But even though the broader market has performed quite well, there are still some high-quality stocks that have lost ground in 2023 and continue to trade at big discounts compared to previous highs.
If you're on the hunt for beaten-down stocks with explosive comeback potential, read on for a look at the shares of two companies down more than 75% from their peaks that stand out as great investment opportunities.
PayPal boasts over 400 million active users
Parkev Tatevosian: Surprisingly, PayPal (PYPL 2.90%) stock is down about 80% from its high in recent years. Sure, the company is facing challenges in the near term that warrant some concern, but I feel like a sell-off of this magnitude is a buying opportunity for long-term investors.
For starters, PayPal makes it more convenient to shop online. This added convenience has been reason enough for hundreds of millions of people to create and use their PayPal accounts.
I mentioned earlier that there were concerns surrounding PayPal, and active accounts are one of them. Despite the enormous scale, PayPal has shed active accounts for three consecutive quarters. The decreases have been relatively modest, with its peak user count reaching 435 million before falling to 428 million as of its latest update.
Macroeconomic factors can explain part of the decrease. People are spending more time and money away from home, which are transactions where PayPal adds less convenience.
Additionally, newly appointed Chief Executive Officer Alex Chriss has stated he will be focused more on profitable growth, so new accounts may not be a priority. Looking at the bigger picture could reassure weary investors. PayPal has increased revenue from $15.5 billion to $27.5 billion between 2018 and 2022. At the same time, PayPal's operating income has risen from $2.5 billion to $4 billion.
Data source: YCharts
Finally, PayPal stock is trading at a relatively cheap valuation, with a forward price-to-earnings (P/E) ratio of 10. In my opinion, the lower price more than compensates investors for the near-term headwinds PayPal must traverse.
This cutting-edge company is turning a corner
Keith Noonan: Like many fintech stocks, Block (SQ 2.32%) has performed relatively poorly over the past few years due to macroeconomic shifts and business-specific pressures. The company's share price has fallen roughly 4% in 2023 despite the year's broadly bullish backdrop, and it's down about 80% from the record high in August 2021.
But while Block stock continues to trade in deeply beaten-down territory, its business appears to be turning a corner.
In the third quarter, Block recorded a gross profit of $1.9 billion, up 21% year over year. Gross profit from the company's Cash App business rose 27% year over year to reach $984 million, and gross profit for its Square merchant payment-processing business rose 15% to reach $899 million.
Notably, CashApp now accounts for the majority of the company's gross profits, and that bodes well for future growth. Not only is CashApp the largest source of gross profit for the company, it's also posting growth that far outstrips what Square is posting. At the very least, this suggests that Block is on track to see strong gross profit expansion continue in the near future.
The outlook on Block's long-term profitability is improving as well. Although Block posted an operating loss of $10 million in the third quarter, the company looks poised to shift into posting operating profits in the near future. On a non-GAAP (adjusted) basis, which factors out stock-based compensation and other one-time expenses, the business actually posted operating income of $90 million last quarter.
Management is taking a cost-conscious approach to growth and executing efficiently, and the business continues to look highly scalable. With Cash App now being the company's biggest source of gross profit and expanding at a rapid clip, the potential is there for overall revenue and gross-profit growth to accelerate in the near term and facilitate improved bottom-line performance.
Block, a stock that is down enormously from its highs, is a company that could deliver big wins for investors.
