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Whether you’re a relatively new investor or have been putting your money to work on Wall Street for decades, there’s never been a year quite like 2022. Thus far, the bond market has had its worst year in history, while the broad-based S&P 500, which is often viewed as the most encompassing barometer of U.S. stock market health, fell more on a percentage basis in the first six months of the year than it had since 1970.
But the worst pain of all has been reserved for the technology-dependent Nasdaq Composite (^IXIC -0.70%), which plunged as much as 38% on a peak-to-trough basis following its November 2021 high. Though all three major U.S. stock indexes fell into the grips of a bear market in 2022, the Nasdaq has fared the worst.
Image source: Getty Images.
Although bear market drops can be scary in the short run, they’re historically the perfect time for investors to pounce. That’s because every bear market throughout history was eventually put into the rearview mirror by a bull market.
In particular, a big-time pullback in the Nasdaq is the ideal excuse to go bargain hunting for growth stocks. What follows are five exceptionally cheap growth stocks you’ll regret not buying on the dip.
The first super cheap growth stock that’s begging to be bought as the Nasdaq slumps is cloud-based customer relationship management (CRM) software provider Salesforce (CRM 0.75%). For those curious, CRM software is used by consumer-facing businesses to oversee product and service issues, handle online marketing campaigns, and run predictive sales analyses for new products and services.
Although we’re seeing a bit of slowing in CRM software demand as rapidly rising interest rates temper growth expectations, this doesn’t change the fact that Salesforce is the king of the hill within the CRM space. According to IDC, Salesforce accounted for close to 24% of worldwide CRM spend in 2021 — the company’s ninth-consecutive year as the world’s No. 1 cloud-based CRM software provider. What’s more, its market share has expanded annually for more than a half-decade.
While Salesforce has shown that it can organically grow at a healthy pace, CEO and co-founder Marc Benioff has also overseen multiple acquisitions. These buyouts not only diversify Salesforce’s revenue stream, but are geared at broadening the company’s ecosystem and providing new cross-selling opportunities.
With a forward-year price-to-earnings (P/E) ratio of 23, Salesforce is cheaper now than at any point of its publicly traded existence.
A second dirt cheap growth stock that you’ll be kicking yourself for not buying during the Nasdaq bear market dip is biotech stock Exelixis (EXEL -4.54%).
The first thing to understand about biotech stocks is that they’re highly defensive. Even though rising interest rates will make access to capital a bit pricier, patients will still need prescription drugs no matter how poorly the U.S. economy or stock market perform. This allows drug developers to pretty accurately forecast sales year in and year out.
What makes Exelixis so special is the company’s blockbuster cancer drug Cabometyx, which is approved to treat first- and second-line renal cell carcinoma and advanced, previously treated, hepatocellular carcinoma. While these indications are bringing in north of $1 billion in annual sales, it’s the company’s six dozen ongoing clinical trials that have the potential to expand Cabometyx’s label and drive sales and cash flow even higher.
Don’t overlook Exelixis’ balance sheet, either. With around $2.1 billion in cash, cash equivalents, and restricted cash and investments, it has more than enough capital to forge collaborative partnerships (which it’s been doing) and advance novel compounds into clinical trials.
At 16 times Wall Street’s consensus earnings per share for 2023 and touting double-digit sales growth, Exelixis is a clear-as-day bargain.
Image source: Getty Images.
The third exceptionally cheap growth stock you’ll regret not adding to your portfolio during the Nasdaq bear market decline is online-services marketplace Fiverr International (FVRR -1.28%).
Fiverr’s biggest catalyst is arguably the permanent shift we’ve witnessed in the labor force in the post-pandemic world. Even though some people have returned to the office, more are working from home than ever before. This burgeoning and sustainable remote-work environment plays right into the hands of freelancer marketplace platforms like Fiverr.
But it’s not just macro labor trends that favor Fiverr (say that three times fast!). It’s the platform itself and the company’s take rate. As I recently extolled, Fiverr freelancers present their jobs with an all-in price. This differs from most online-service marketplaces where freelancers charge an hourly rate, but the total cost of a project is less clear. In other words, price transparency is helping to draw buyers to Fiverr’s platform, as evidenced by the steady increase in spend per buyer.
Also, Fiverr’s take rate — how much it keeps of each deal negotiated on its platform — is 30%, nearly double that of its closest competitors. This means better margins and profitability as revenue scales.
Though a forward P/E of 29 might not sound cheap, it’s an incredible deal considering Fiverr’s superior growth potential over the next five years.
Yet another bargain-priced growth stock you’ll regret not scooping up on the Nasdaq bear market dip is cloud-based adtech stock PubMatic (PUBM -1.32%). Even though ad spending tends to decline when economic uncertainty arises, PubMatic has a slew of competitive advantages in its sails.
One of the more interesting competitive edges PubMatic holds in the programmatic ad arena is being a sell-side provider (SSP). SSPs help publishers sell their digital display space. Thanks to a number of acquisitions, there aren’t many large-scale SSPs to choose from, which leaves PubMatic to grow at a pace that’s well above the industry average.
PubMatic’s digital focus is also perfectly positioned to take advantage of ad dollars shifting away from print and toward mobile, video, and connected TV (CTV). As more streaming services introduce ad-supported platforms, CTV should help PubMatic easily outpace its peers in the growth department.
Additionally, PubMatic went the extra mile to design and develop its cloud-based programmatic ad infrastructure. Since it’s not relying on a third party, more of its revenue will flow straight to its bottom line.
Similar to Fiverr, its forward P/E of 30 might not appear cheap. However, with a sustained growth rate of more than 20% during periods of expansion, a focus on CTV, and a debt-free balance sheet, PubMatic looks like a steal.
The fifth and final exceptionally cheap growth stock you’ll regret not buying on the Nasdaq bear market dip is Alphabet (GOOGL -0.94%) (GOOG -0.94%), the parent company of internet search engine Google.
Like PubMatic, Alphabet is an ad-driven business. As economic growth slows, advertisers tend to pull back on their spending (at least temporarily). But that’s no reason to avoid Alphabet. For more than two years, Google has accounted for no less than 91% of global internet search share on a monthly basis. Having a veritable monopoly gives Google superior ad-pricing power more often than not. This segment is effectively Alphabet’s cash cow.
But the fun part for long-term shareholders in Alphabet is seeing where the company is reinvesting that cash. Some of it has gone to streaming platform YouTube, which is the second most-visited social site on the planet. Successfully monetizing YouTube Shorts should help eventually push YouTube’s annual ad sales to north of $30 billion.
There’s also cloud infrastructure service segment Google Cloud, which accounted for 9% of worldwide cloud-service spending in the third quarter, per Canalys. Cloud spending is still in its early stages, and it tends to generate juicier operating margins than advertising. By 2025, it wouldn’t be a surprise if Google Cloud were generating a significant portion of Alphabet’s operating cash flow.
Over the past five years, Alphabet has traded at an average multiple of 19 times its cash flow. Investors can buy shares right now for about 10 times Wall Street’s forecasted cash flow for the company in 2024.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet, Exelixis, and PubMatic. The Motley Fool has positions in and recommends Alphabet, Fiverr International, PubMatic, and Salesforce. The Motley Fool recommends Exelixis. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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