Market volatility can make investors feel very uneasy about their financial future. However, wild swings in share prices give long-term investors the opportunity to score bargains before Wall Street realizes its mistake. The key is to ignore the stock market and focus on the key advantages of the underlying business.
There are terrific buying opportunities in beaten-down growth stocks right now. Toast (TOST 0.18%), SentinelOne (S +5.26%), and Chewy (CHWY +3.37%) have fallen well off their highs, but these companies have continued to grow in a challenging economy, and more growth could change the market's tune in a new year. Here are the key factors that could send these stocks higher.
NYSE: TOST
Key Data Points
Toast
Toast is a leading software platform that makes running a restaurant a lot easier. It helps streamline order management and other administrative tasks. Revenue has doubled over the last two years, with a massive growth opportunity still ahead. The company has seen growth slow over the last year amid macroeconomic issues, like inflation hurting consumer spending, but the stock's low valuation is too cheap to pass up.
The shares trade at a price-to-sales (P/S) ratio of 2.24, below the S&P 500 average. It's incredibly cheap, considering many fast-growing software companies are valued at P/S multiples of around 10 or more, especially in the early stages of growth.
Investors are concerned about the outlook for eating out if the economy falls into a recession, not to mention the potential for competition to slow Toast's momentum in winning new customers. However, Toast has a key advantage being overlooked. About two-thirds of the company's employees previously worked in restaurants.
That means the company is very attentive to feedback from restaurant managers. Toast can take this feedback to improve the platform to meet customers' needs. It's an important factor that helps Toast design an easy-to-use platform that makes legacy restaurant systems look outdated and out of touch with the modern needs of restaurant owners.
It's this aspect of Toast's operating culture that explains why revenue grew another 37% year over year in the third quarter. The stock's valuation is an absolute bargain against that growth. Investors should consider buying shares now because the stock may not be this cheap for long.
NYSE: S
Key Data Points
SentinelOne
After tumbling in 2022, shares of SentinelOne are up around 80% in the last six months. The cybersecurity leader operates in a crowded market against well-entrenched rivals like CrowdStrike and Zscaler. The threat of competition has been the primary reason SentinelOne shares have traded at a deep discount to these cybersecurity stocks. However, the latest business update for the third quarter proves once again that the discount is unjustified.
SentinelOne said revenue grew 42% year over year in the last quarter. It has consistently grown faster on the top line than competitors. It is seeing not only booming demand for endpoint security, which is CrowdStrike's main strength, but also growth in other solutions, such as cloud and identity security.
With each quarter that SentinelOne posts growth comparable to other industry leaders, it builds the case that the shares are significantly undervalued. On a P/S basis, SentinelOne shares trade at a 38% discount to CrowdStrike. One reason is that SentinelOne is still unprofitable, but the company has significantly improved free cash flow this year. As the business continues to grow, SentinelOne will be able to leverage its costs and report a healthy profit like its larger rivals -- a key catalyst to watch.
Despite the stock's jump following the recent earnings report, investors are still getting a great deal. The momentum could carry over to the new year and earn investors market-beating returns in 2024 and beyond.
NYSE: CHWY
Key Data Points
Chewy
Chewy is another growing business that the market is significantly underestimating right now. This is a leading online pet supply brand that has continued to report solid revenue growth in a challenging retail environment. The stock is currently sitting at a low P/S ratio of 0.7, cheap for an online retail business. The company's prospects for profitable growth should earn a higher valuation over time.
The latest business update for the fiscal third quarter showed revenue increasing by 8% year over year, which was lower than the 14% growth in previous quarters. The important thing is that Chewy is gaining market share and continues to push gross margin higher.
Chewy has been investing in new automated fulfillment centers, which is beneficial to profitability. Chewy should see faster growth in net income over the long term as it continues to expand geographically and leverage its fixed costs on distribution centers.
The pet industry is valued at more than $100 billion and growing. That gives Chewy a long runway for growth. Investors who buy the stock at these lows could see awesome returns over the next decade.
