With the major market indices hitting new highs, some investors are cautious and bracing for a correction, especially with August being a historically weak month for the markets. There are always risks in the stock market, of course. One way to mitigate downside volatility is to allocate some funds to growth stocks that are already beaten down but still have solid long-term prospects.
The following two companies have seen their share prices collapse over the past few years due to macroeconomic headwinds. However, their long-term prospects are still intact, setting these stocks up for a rebound. Here's why they could return 50% by the end of next year.
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1. Alibaba
Alibaba (BABA 0.18%) stock has rebounded over the past year, up about 50% at the time of this writing. It continues to look undervalued amid China's economic recovery. While Alibaba's total sales across e-commerce, logistics operations, and digital entertainment are growing at single-digit rates, the market could be significantly underestimating Alibaba's opportunity in artificial intelligence (AI).
Trading at just 14 times forward earnings estimates, investors are getting solid value for one of the world's leading tech companies. Alibaba e-commerce marketplaces like Taobao and Tmall are posting steady growth. Commerce segment revenue grew 9% year over year in the March-ending quarter -- an improvement over the 3% growth for the full year. Sales should improve as Alibaba integrates AI across its e-commerce businesses. AI is improving content discovery, product recommendations, and other services that are improving the customer experience.
Moreover, Alibaba's Amap just launched a new map service that uses AI to intelligently plan a route based on individual preferences. It can use spatial intelligence to reason and create a detailed plan for a road trip. It reflects Alibaba's growing AI capabilities and how it is leveraging this technology across its businesses.
This comes as Alibaba's cloud computing business has experienced strong demand from enterprises. AI-related services in Alibaba Cloud have grown at over 100% year over year for seven consecutive quarters, yet the stock continues to trade at a modest valuation.
The average price target on Wall Street is $151, representing upside of just 19%, but it could easily exceed that if the price-to-earnings multiple increases.
If the economy continues to improve and Alibaba shows strength in its core businesses like e-commerce and cloud services, investor sentiment will grow more bullish. The stock could climb back to $200, or about 60% higher from current share prices, which would still be below its all-time high and bring its price-to-earnings multiple to a reasonable 19 on fiscal 2027 estimates.
2. Lululemon Athletica
Lululemon Athletica (LULU 3.23%) has a lucrative position in the activewear market as a premium brand. It earns higher margins than its competitors, but investors can currently buy shares at a steep discount that undervalues the long-term growth of the business.
The stock trades at just 13 times this year's consensus earnings estimate. This is for a brand that grew revenue and earnings at high double-digit rates over the last 10 years. Lululemon runs one of the most efficient and profitable store operations in retail, with sales per square foot of $1,574 in 2024. This puts Lululemon's brand in between luxury brands like Tiffany's ( $3,000 per square foot) and discount retailers' typical range of $300 to $400.
Management is aiming to bolster its stores' sales efficiency. Its strategy includes expanding the size of its stores to more broadly capture sales opportunities across men's, women's, and accessories. Given Lululemon's high profit margin of about 17%, more investment in improving sales efficiency could boost its earnings growth. A return to double-digit sales and earnings growth is very achievable, given that Lululemon is still a relatively small brand in the activewear industry.
International growth is still in the early innings. Lululemon's international revenue grew 19% year over year last quarter, compared to 3% in the Americas. Both of these geographies should see stronger growth in a healthier economic environment.
The Wall Street average price target is $283, representing upside of 41%. This is a reasonable target for 2026, but the stock could easily hit $300 if market sentiment improves. The stock would need to trade at just 19 times next year's consensus earnings estimate to reach that level and rise by 50% from the current $200 share price. A combination of double-digit annualized earnings growth over the long term and a higher P/E could lead to spectacular returns from these depressed share prices.
