In 2022, the S&P 500 lost 20%, posting its worst year since 2008. It was a tough year for investors and growth stocks specifically, as rising interest rates and geopolitical uncertainty put pressure on companies with lofty valuations.
Sell-offs in the market can be painful, but for investors, times like this present an opportunity to buy quality companies at cheap valuations. The following beaten-down growth stocks trade near their lowest valuations this decade and represent an intriguing buying opportunity today for investors with a long time horizon.
Image source: Getty Images.
1. Shopify
Shopify (SHOP 1.25%) provides small businesses the tools to handle everything from payments to inventory management. Shopify investors have endured a roller-coaster ride regarding the stock price. It was a huge winner during the pandemic when lockdowns and travel restrictions pushed consumers to spend more money online than ever before.
During the two years ending in 2021, Shopify's revenue surged 192% and it saw record profits of $2.9 billion. Management for the e-commerce platform believed this was the beginning of a trend that would see a massive shift to online shopping and poured millions into expanding the business.
Revenue grew 21% in 2022 to $5.6 billion, but its operating expenses ballooned by 62%. Shopify's bottom line swung to a net loss of $3.5 billion after putting up $2.9 billion in profit. Since peaking in November 2021, Shopify stock has lost over 76% and trades near its lowest valuation since going public.
Data by YCharts.
The sell-off presents an attractive opportunity for long-term investors. Management admitted that it overshot projections, and began cutting costs midway through last year. Additionally, long-term trends still favor the e-commerce giant.
Before the pandemic, e-commerce accounted for 15% of retail sales. Morgan Stanley analysts estimate that 22% of sales are through e-commerce today, and it expects it to grow to 27% of all retail sales by 2026.
Image source: Statista.
Shopify is also building out its payment processing solution, with makes it easy for merchants to accept and process payments. Last year, its gross payments volume totaled $106.1 billion, up from $85.8 billion the year prior. More than half -- or 54% -- of Shopify's gross merchandise volume was processed through its payment solution, showing room for growth from here.
2. PayPal
Another pandemic-era winner that was beaten down in the last year is PayPal Holdings (NASDAQ: PYPL). Over two years ending in 2021, PayPal added 122 million new accounts, grew revenue by 43%, and surpassed $1 trillion in total payment volume for the first time. Management set aggressive goals for the fintech back in February 2021, aiming to double its active accounts and free cash flow by 2025. Those goals were a little overenthusiastic.
The reopening of the economy and lifting of travel restrictions resulted in slower growth for PayPal, leading to multiple revisions to its guidance last year. It also shifted its focus from growing new accounts to increasing the transactions per active account (TPA). These changes resulted in a sharp sell-off, with the stock down 75% since it peaked two years ago. The fintech now trades at its cheapest valuation since it spun off eBay in 2015.
Data by YCharts.
PayPal is a lot cheaper today than it was, but its long-term growth prospects are solid. PayPal is the most accepted digital wallet in North America and Europe, with over 79% of the 1,500 largest retailers accepting it. Apple Pay is the next most accepted at 28%. Juniper Research estimates that digital wallet users will exceed 5.2 billion globally by 2026, a 53% growth rate from today.
Image source: PayPal Holdings.
While several big banks are working on a digital wallet of their own, PayPal has had a significant head start and a huge customer base, putting it in an excellent position to benefit from these long-term tailwinds.
3. SVB Financial
SVB Financial Group (SIVB.Q 20.00%) is the parent company of Silicon Valley Bank, which provides banking services to start-ups and the ecosystem around them. According to PitchBook, almost half of U.S. venture-backed technology and life sciences companies bank with SVB. Its clients include those who fund start-ups, including venture capital (VC) and private equity firms.
While the past year was challenging for the stock market, start-ups had an even tougher time as falling valuations and tepid capital markets caused funding to dry up during the year. According to Crunchbase, VC funding plummeted 35% in the last year. The pullback in funding was larger than that of the great recession in 2008, and the dot-com bubbled, according to Preqin and reported by Bloomberg.
As a result, the bank of the innovation economy saw its price drop 62% from its peak in 2021. SVB also trades near a decade-low valuation as seen below.
Data by YCharts.
SVB Financial is vulnerable to start-up funding pullbacks, and last year was one of the deepest pullbacks ever. As a result, the bank saw its noninterest-earning deposits fall 29% from the prior year. However, SVB has been a solid long-term performer. Since 2007, the bank's interest-earning assets have grown by 27%, compounded annually.
It's not a question of if, but when, SVB Financial Group bounces back. Recovery in the VC funding markets will be slow. SVB Financial CEO Greg Becker sees a 10% to 20% decline in VC activity in the first half of this year, followed by a modest pickup in the second half. As funding improves, SVB Financial is positioned to bounce back in a big way.
