When a stock's valuation collapses, there are usually good reasons behind it. At the same time, it's not unusual for negative sentiment to push a company's share price far lower than it should be. It's also not unusual for Wall Street to minimize or overlook good things happening with a business when its stock has been struggling for a while.
These situations can actually create explosive opportunities for investors. If you're on the hunt for cheap stocks that have what it takes to serve up incredible gains, read on to see why two Motley Fool contributors think these are two of the best companies you can invest in this January.
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Customers always value convenience
Parkev Tatevosian: While many growth stocks recovered in 2023, PayPal (PYPL +0.52%) stock lagged. Looking further back, PayPal stock is down 80% off its high in recent years. That's an opportunity for long-term investors looking for a cheaply valued growth stock.
PayPal adds convenience to people's lives by making it easier to shop online. Instead of typing in your credit card information on every new site from which you buy merchandise, you can use your PayPal account, which leads to quicker transactions. It also tends to be more secure.
That convenience has led to PayPal adding hundreds of millions of active customers and solid revenue expansion. From 2014 to 2022, PayPal's revenue increased from $8 billion to $28 billion. Given the value Paypal adds to facilitate transactions, it wouldn't surprise me if the company's revenue continued to increase for several years.
PYPL PE Ratio (Forward 1y) data by YCharts.
Of course, providing value to customers is the easy part of the business. The challenge is doing so profitably. PayPal has undoubtedly passed that test. In the same years mentioned above, the company's operating income has grown from $1.3 billion to $4 billion.
Perhaps best of all, investors can buy PayPal stock at a relatively cheap valuation. After the sell-off, PayPal trades at a forward price-to-earnings ratio of 9.9, a bargain price for a company growing revenue and profits at those levels.
This cheap stock is ready to explode
Keith Noonan: After Fiverr International (FVRR +2.00%) rocketed to a price above $323 per share early in 2021, its shareholders were hit with some grim realities. For starters, investors started pivoting out of growth-dependent stocks due to expectations that the Federal Reserve would begin raising interest rates before too long.
The gig-labor company's sales growth also began decelerating at a rapid clip. The business had seen an incredible surge in demand at the height of pandemic-driven office closures and social-distancing protocols, but these tailwinds evaporated as the world moved closer to a state of normalcy. Making matters worse, the company's subsequent quarterly results were compared to extraordinary periods.
Due to these factors, Fiverr's revenue grew just 4.2% year over year in the fourth quarter of 2022. Then in the first quarter of 2023, revenue increased just 1.5%. Growth in Q2 inched up, but still only came in at 5.1%.
For a company that had previously been recording explosive growth, the momentum collapse was dramatic. With shares down roughly 92% from the high they reached three years ago, Fiverr's stock collapse has also been dramatic.
But there are good reasons to think that the stock will go on to deliver explosive returns for investors who buy at today's depressed levels.
NYSE: FVRR
Key Data Points
Fiverr's revenue growth accelerated to 12.1% year over year in last year's third quarter, reaching $92.5 million. Average spending per buyer on the platform rose roughly 4% year over year, and the gig-economy specialist also increased its average commission to 31.3% from 30% in the prior-year period. Meanwhile, non-GAAP (adjusted) earnings per share rose 143.5% annually.
For the fourth quarter, Fiverr estimates that its sales could grow as much as 14% year over year. Now that revenue growth is picking up again and margins are improving, the potential is there for this beaten-down stock to post explosive returns.
There are signs that a turnaround is underway. Trading at just 11 times this year's expected earnings, Fiverr stock could deliver huge wins.
