It's been a truly banner year for Wall Street. All three major stock indexes have rallied strongly from their 2022 bear market lows, with the growth stock-fueled Nasdaq Composite (^IXIC 2.02%) leading the charge. Through the closing bell on Dec. 13, the Nasdaq was higher by 41% for the year.
Yet in spite of this massive return, Wall Street's favorite innovation-powered index remains 8% below its all-time closing high, set a little over two years ago. Though some traders are bound to view this as a lost period for growth stocks, long-term investors will wisely see this decline as an opportunity to build their stakes in fast-growing, high-quality businesses at a discount.
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What follows are four unequaled growth stocks you'll regret not buying in the wake of the Nasdaq bear market dip.
Alphabet
The first head-of-its-class stock to confidently add to your portfolio with the Nasdaq still well off of its all-time high is Alphabet (GOOGL 10.22%) (GOOG 9.96%), the company behind internet search engine Google and streaming platform YouTube, among other ventures.
The reason Alphabet stock isn't at an all-time high has to do with recessionary concerns. Alphabet generated almost 78% of its sales from advertising during the September-ended quarter. With a handful of money-based metrics suggesting an economic downturn is on the horizon, there's the very clear worry that ad spending will slow.
However, this is a two-sided coin for Alphabet, and it very much favors the patient. While recessions are inevitable, they tend to be short-lived. Only three of the 12 recessions following World War II lasted at least 12 months, with none surpassing 18 months. Despite being cyclical, ad-driven businesses benefit from long-winded economic expansions.
For more than a decade, Google has been Alphabet's foundational operating segment. As of November, it accounted for 91.54% of worldwide internet search share, according to GlobalStats. In fact, Google has been responsible for at least 90% of monthly internet search share dating back to the first quarter of 2015. This is going to remain a cash-cow segment for a long time to come.
From a growth perspective, what's really exciting for Alphabet is its cloud infrastructure service operations. Following years of losses, Google Cloud, the global No. 3 for cloud infrastructure service spending, has delivered three consecutive quarterly profits. Cloud margins are considerably higher than advertising margins, which clears a path for this segment to potentially become Alphabet's key driver of cash flow.
Despite a strong rally for Alphabet's stock in 2023, it remains historically inexpensive.
Okta
A second unequaled growth stock you'll regret not scooping up in the wake of the Nasdaq bear market drop is cybersecurity company Okta (OKTA -0.69%).
It's no secret why Okta's stock has been under pressure in recent weeks. In late September, the company was the target of hackers who breached its support systems and stole sensitive information. Okta confirmed in late November that all of its clients were affected. Though this could cost the identity verification solutions provider some customers in the very short-term, both Okta's platform and the dynamics of the cybersecurity industry are working in its favor.
With regard to the latter, businesses with an online or cloud-based presence don't have the luxury of choosing to go unprotected. Hackers and robots don't take time off when it comes to trying to steal enterprise and consumer data. As the movement of data into the cloud has accelerated, reliance on third-party providers like Okta has become even more pronounced.
Though Okta's platform was breached by hackers, it's only going to grow more efficient and effective over time. Okta's platform is cloud-native and reliant on artificial intelligence and machine learning to "evolve" and spot potential threats. Identity verification is an $80 billion addressable market that's still in its relative infancy.
The other key growth driver for Okta is its acquisition of Auth0, which was completed in February 2022. Despite higher-than-expected integration costs, this buyout is a building block for the company. It vastly expands the combined companies' opportunity in customer identity (a $30 billion addressable market), and meaningfully grows Okta's sales potential beyond the borders of the U.S. In other words, it should allow Okta to comfortably sustain a double-digit growth rate.
Image source: Getty Images.
Baidu
The third supercharged growth stock that's begging to be bought following the Nasdaq bear market decline is China-based internet search giant Baidu (BIDU 0.62%).
China stocks have had a rough couple of years. The world's No. 2 economy by gross domestic product struggled through three years of stringent COVID-19 lockdowns that crippled supply chains and capped consumer demand for goods and services. Even with these restrictions now lifted, it's taking time for the previously fast-growing Chinese economy to regain its swagger.
On the other hand, the same macro premise I described with Alphabet holds true with Baidu. Economic downturns tend to be short-lived, while periods of expansion can go on for years. It also doesn't hurt that China has consistently grown at a faster pace than most developed countries. With a burgeoning middle class, there's plenty of reason to be excited about high-growth China stocks if you're a long-term-minded investor.
Like Alphabet, Baidu has a veritable stranglehold on internet search market share. In November, it accounted for nearly 69% of search share for the world's No. 2 economy. With few exceptions, it's held a 60% to 85% search share in China over the past nine years. This makes it the logical go-to for advertisers and should afford the company exceptional ad-pricing power.
Baidu's AI-driven ventures are, arguably, even more compelling from an investment standpoint. Baidu is one of China's leading cloud-service providers, and Apollo Go is one of the world's top autonomous ride-hailing platforms. Baidu's non-online marketing segment has pretty consistently outpaced the growth of its search-driven segment.
At roughly 10 times forward-year earnings, Baidu is dirt cheap and ripe for the picking.
PayPal Holdings
A fourth unequaled growth stock you'll regret not buying in the wake of the Nasdaq bear market dip is fintech company PayPal Holdings (PYPL 2.90%).
An above-average inflation rate and the noted prospect of a U.S. recession have both worked against PayPal's stock over the past two years. Higher inflation threatens to reduce the purchasing power of low-earning workers, while recessions are known for declines in consumer and enterprise purchases. Since PayPal is predominantly a transaction-focused platform, fewer transactions would lead to a decline in gross profit for the company.
However, these fears haven't come to fruition. PayPal's key performance metrics continue to march higher, with total payment volume traversing its platforms consistently climbing by a double-digit percentage. It's important to recognize that we're still very early in the digital payment adoption cycle, and PayPal is leading that charge.
What's even more noteworthy for PayPal is that its users are more engaged than ever. As of the end of 2020, shortly after the COVID-19 pandemic began, active PayPal accounts were averaging just shy of 41 transactions over the trailing-12-month (TTM) period. Based on the company's third-quarter report (ended Sept. 30, 2023), its active accounts are now averaging closer to 57 transactions over the TTM. As a usage-driven model, this is excellent news for PayPal and its shareholders.
PayPal's new CEO, Alex Chriss, is making waves as well. Chriss has the knowledge to identify areas of growth for PayPal, but isn't afraid to reduce costs in order to bolster the company's operating margin. When coupled with an aggressive share repurchase program, PayPal stock is cheaper than it's ever been as a publicly traded company.
