Down Over 70%, These 3 Monster Growth Stocks Are Bursting with Long-Term Potential

The Nasdaq Composite is officially back in a bear market, which happens when an index is down 20% or more from its all-time high. Meanwhile, the S&P 500 is in correction territory — which is a drawdown of at least 10% from the all-time high — while the Dow Jones Industrial Average is just 33 basis points from a correction. 

However, the damage has been much worse for individual stocks, with droves of companies large and small down 70% or more from their all-time highs. PayPal Holdings (PYPL -4.52%), Netflix (NFLX -4.59%), and Shopify (SHOP -3.71%) are three growth stocks that have seen their valuations absolutely torched in a matter of months.

PYPL data by YCharts.

For context, consider that the cumulative market cap of all three companies at the time of this writing is $239.3 billion, which is less than PayPal or Netflix alone were worth at their peak valuation and just a little bit above what Shopify was worth at its peak valuation. 

Here’s why each company is bursting with long-term potential and could be worth buying now.

Two people folding clothes while working from a laptop as they run their small business.

Image source: Getty Images.

The challenges of rising interest rates

PayPal, Netflix, and Shopify are all facing similar headwinds despite being in different industries. To combat high inflation, the Federal Reserve is raising interest rates, which increases the cost of financing and makes it more expensive to borrow money. Rising interest rates do not affect these companies too much, considering none of them rely heavily on debt and all tend to be free-cash-flow positive. But rising interest rates do impact the economy overall and, in turn, consumers.

On top of this, there is the trend toward slower growth for all three companies. Here are revenue and earnings per share (EPS) average analyst estimates for 2022 and 2023, as well as 2021 figures.

Company

2023 Estimated Revenue 

2023 Estimated EPS 

2022 Estimated Revenue 

2022 Estimated EPS 

2021 Revenue

2021 EPS

PayPal

$34.98 billion

$5.76

$29.28 billion

$4.63

$25.37 billion

$3.52

Netflix

$35.32 billion

$11.97

$32.41 billion

$10.89

$29.7 billion

$11.24

Shopify

$10.19 billion

$6.48

$7.68 billion

$4.35

$4.61 billion

$22.9

Data source: Yahoo! Finance. Table by Author.

As you can see in the table, all three companies are expected to continue growing revenue in the years to come. It’s worth mentioning that Shopify’s 2021 EPS was a bit of an anomaly, as it only made $268.64 million in income from operations but posted net income of $2.91 billion due to other net income of $2.87 billion. So really, the company is poised to continue growing EPS in the years to come, as are PayPal and Netflix.

Growth concerns

Despite a fairly optimistic forecast, slowing year-over-year (YOY) revenue growth is a problem for all three companies.

Company

2023 YOY Estimated Revenue Growth 

2023 YOY Estimated Earnings Growth 

2022 YOY Estimated Revenue Growth 

2022 YOY Estimated Earnings Growth (Decline) 

2021 YOY Revenue Growth 

2021 YOY Earnings Growth (Decline)

PayPal

19.47%

24.41%

15.41%

31.5%

18.26%

(0.56%)

Netflix

8.98%

9.92%

9.12%

(3.1%)

18.81%

84.87%

Shopify

32.68%

48.97%

66.59%

(81%)

57.43%

784.2%

Data source: Yahoo! Finance. Table by Author.

As you can see in the table above, PayPal’s revenue growth rate for 2021 was below 20% and is expected to stay below 20% in 2022 and 2023. Similarly, Netflix posted less than 20% year-over-year revenue growth in 2021, but its revenue is expected to grow by less than 10% per year in 2022 and 2023. Meanwhile, Shopify’s revenue growth remains high but is expected to slow down to close to 30% in 2023.

The slowing growth is a big deal, particularly for Netflix, which used to grow revenue at 30% or more per year.

Valuations have come down for a reason

Slowing growth paired with macroeconomic headwinds have compressed valuations for all three companies. Again, going off average analysts’ estimates, PayPal now has a 2022 forward price-to-sales (P/S) ratio of just 3.32 and a forward price-to-earnings (P/E) ratio of 18.08. Netflix is similarly priced with a 2022 forward P/S ratio of 2.72 and a forward 2022 P/E ratio of 18.22.

Company

2023 Forward P/S Ratio

2023 Forward P/E Ratio

2022 Forward P/S Ratio

2022 Forward P/E Ratio

Current P/S Ratio

Current P/E Ratio

PayPal

2.78

14.53

3.32

18.08

3.84

23.78

Netflix

2.49

16.57

2.72

18.22

2.97

17.65

Shopify

5.29

66.06

7.02

98.41

11.69

18.69

Data source: Yahoo! Finance. Table by Author.

Meanwhile, Shopify could see its P/S ratio continue to compress — from its current 11.69 down to 7.02 by 2022 and then 5.29 by 2023. Keep in mind that this is a stock that spent most of 2021 with a P/S ratio between 40 and 60. 

Where to go from here

During bear markets, fundamentals are stressed and valuations compress. When growth slows or is projected to slow, companies that were priced to sustain higher growth arguably deserve to see their valuations fall. But that compression can lead to some attractive buying opportunities for long-term investors.

In this vein, PayPal, Netflix, and Shopify were overvalued at their peak prices, and investors would do well to avoid anchoring those all-time prices as a reasonable valuation for any of the three companies. However, investors are now able to get all three companies at their least-expensive valuations in years, which more than compensates for slower growth.

Investors could do well to simply consider a starter position in any of these three businesses. Value-orientated investors might be more interested in PayPal and Netflix, while growth investors may gravitate toward Shopify.

No one knows how much worse the bear market could get. But we do know that PayPal and Netflix, in particular, are two profitable companies that should continue to grow revenue and earnings in the years to come, even if it is at a much slower rate than in years past.

Candice Cearley

Next Post

Sundial Reports Full Year and Fourth Quarter 2021 Financial and Operational Results

Sun May 1 , 2022
CALGARY, AB, April 27, 2022 /PRNewswire/ – Sundial Growers Inc. (NASDAQ: SNDL) (“Sundial” or the “Company”) reported its financial and operational results for the full year and fourth quarter ended December 31, 2021. All financial information in this press release is reported in millions of Canadian dollars and represents results […]