Time to Pounce: 2 Historically Cheap Growth Stocks That Can No Longer Be Ignored
Over the long run, Wall Street is a wealth-building machine. When compared to other asset classes, such as bonds, housing, and commodities (e.g., oil and gold), nothing comes remotely close to the annualized returns that equities have delivered over the last century.
But this doesn’t mean stocks move up in a straight line.
The first three trading sessions of August featured the growth-stock-powered Nasdaq Composite shedding roughly 1,400 points, or 8% of its value, which officially put it in correction territory. Although steep declines can be unnerving (especially for newer investors), they have historically represented an opportune time for long-term investors to pounce.
While we’re never going to be able to predict with any precision when downturns will begin, how long they’ll last, or where the bottom will be, we do know that the major indexes rise in value over time. Spotting price dislocations in high-quality businesses during market corrections is often a winning strategy.
What follows are two historically cheap growth stocks investors can pounce on that simply can’t be ignored any longer.
Time to pounce: Baidu
The first jaw-droppingly inexpensive growth stock that investors can confidently add to their portfolios right now is China-based internet search colossus Baidu (NASDAQ: BIDU).
Admittedly, Chinese stocks have their own unique concerns given the regulatory issues that can crop up when dealing with China’s government. This combination of regulatory oversight and that nation’s economy not quite firing on all cylinders following the end to COVID lockdowns, has weighed on Baidu and other brand-name China stocks.
Thankfully, there are a number of reasons to believe Baidu is near a bottom and is simply too cheap to ignore any longer.
To begin with, the company’s internet search engine has accounted for more than a 50% share of domestic search dating back more than a decade. As the clear go-to for search, Baidu has had no trouble luring advertisers and commanding substantial ad-pricing power. There’s no reason to believe this segment won’t remain a key cash cow for years to come.
But what’s far more exciting is seeing where it’s investing this cash flow. For instance, it’s one of China’s leading cloud infrastructure service providers. Enterprise cloud spending is in its relative infancy in China, and businesses are still early in their spending ramp-up. With cloud-service margins easily trumping advertising margins, we should see Baidu’s operating cash flow meaningfully grow over time.
Baidu is also the company behind Apollo Go, the world’s leading autonomous ride-hailing service. As of April 19, Apollo Go had surpassed 6 million rides since inception, which demonstrates the value of the company’s artificial intelligence (AI) investments in action.
Furthermore, Baidu is sitting on a veritable treasure chest of cash. It closed out the March-ended quarter with around $26 billion in cash, cash equivalents, and marketable securities, which compares quite favorably to its current market cap of $30 billion. If the U.S., Chinese, or global economy were to dip into a recession, Baidu would be in better shape than most companies to ride out the storm.
At less than 8 times forward-year earnings (without adjusting for its $13.7 billion net-cash position), Baidu’s stock is dirt cheap — and the time to pounce is right now.
Time to pounce: Fiverr International
A second high-growth stock that investors can pounce on with confidence is online-services marketplace Fiverr International (NYSE: FVRR).
Whereas AI is expected to propel growth for Baidu’s non-online marketing segment for years to come, there’s been genuine worry on Wall Street that AI would put a serious dent in Fiverr’s online marketplace for freelancers. In other words, AI might “steal” jobs that freelancers had previously overseen, thus limiting the need for online-service marketplaces.
The good news for Fiverr is that it’s been able to embrace AI with open arms and has actually used the technology to modestly boost its sales. It would appear that concerns about AI hurting the freelancer space are largely overblown.
Moving past this headwind, we find four well-defined catalysts that can lift Fiverr.
For starters, the composition of the labor force has permanently changed following the pandemic. More people are working remotely than prior to the pandemic, which is perfect for Fiverr’s platform catering to freelancers.
Secondly, the platform’s differentiation is responsible for a steady increase in spend per buyer. Whereas most competing online-service marketplaces allow freelancers to price their tasks at an hourly rate, Fiverr freelancers list their jobs as completed tasks. This cost transparency is very clearly resonating with buyers on the platform.
The third selling point for Fiverr is its take rate: the percentage of each transaction completed on its platform, including fees, it gets to keep. With most of its competitors having take rates in the mid-teens, Fiverr generated a take rate of 33% in the June-ended quarter.
It is taking a larger percentage of each deal negotiated on its platform, yet is still seeing its buyers spend more per transaction. This is a recipe that should lead to a superior operating margin over time.
Lastly, it has used inorganic means to move into new verticals. Acquiring AutoDS, a provider of subscription-based end-to-end solutions for drop-shippers, is one example of this revenue diversification in action. It’s a new means to generate sales, but it still complements Fiverr’s e-commerce ecosystem.
Fiverr is valued at less than 10 times forward-year adjusted earnings, which is pretty much an all-time low since becoming a public company in June 2019. With sustained double-digit earnings growth a real possibility, now looks like the perfect time for opportunistic investors to pounce.
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Sean Williams has positions in Baidu and Fiverr International. The Motley Fool has positions in and recommends Baidu and Fiverr International. The Motley Fool has a disclosure policy.
Time to Pounce: 2 Historically Cheap Growth Stocks That Can No Longer Be Ignored was originally published by The Motley Fool
