It’s been a wild four years for Wall Street. Since the decade began, all three major stock indexes have oscillated between bear and bull markets in successive years. These swings have been especially noticeable for the growth stock-driven Nasdaq Composite (NASDAQINDEX: ^IXIC).
In 2022, the Nasdaq Composite shed a third of its value and was, by far, the worst-performing major index. Last year, its 43% gain topped the charts. But in spite of this gain, the Nasdaq Composite is the only major stock index that’s yet to reach a new all-time high. In the wake of the 2022 bear market, it remains 4% below its November 2021 record close.
For some investors, this 26-month lull will be viewed as a lost period for growth stocks. But for long-term investors, it represents an opportunity to pick up growth stocks, innovators, and industry leaders at a perceived discount.
What follows are four spectacular growth stocks you’ll regret not buying in the wake of the Nasdaq bear-market dip.
PayPal Holdings
The first magnificent growth stock you’ll be kicking yourself for not buying with the Nasdaq Composite still below its record high is fintech leader PayPal Holdings (NASDAQ: PYPL). Even though competition in the digital-payments space is heating up, PayPal has the tools necessary to succeed.
To start with, it’s on the cutting edge of one of Wall Street’s hottest growth trends. Annual fintech revenue is forecast to grow by a factor of six — from $245 billion to $1.5 trillion — between 2022 and 2030, according to a report from the researchers at Boston Consulting Group. Even if this estimate isn’t spot-on, it demonstrates how early we still are in digital-payment adoption.
Despite stagnant active-account growth in recent quarters, PayPal’s user engagement among active accounts is higher than it’s ever been. In less than three years, active accounts have gone from averaging 40.9 transactions over the trailing-12-month (TTM) period to averaging 56.6 transactions over the TTM, as of Sept. 30, 2023. Since PayPal is mostly driven by fees, more transactions should equate to higher gross profit.
The hiring of Alex Chriss as CEO is another watershed moment for PayPal. Chriss comes over from Intuit, where he headed the company’s segment focused on small businesses. Chriss understands the innovations and opportunities PayPal has with smaller merchants but isn’t afraid to make tough choices and reduce the company’s operating expenses to bolster its margins.
Finally, PayPal stock is effectively cheaper than it’s ever been as a publicly traded company. Shares can be purchased, as of this writing, for less than 12 times forward-year earnings. Considering the company’s long-term growth prospects, industry-leading position in fintech, and aggressive share-repurchase program, it’s a screaming bargain.
Lovesac
A second spectacular growth stock you’ll regret not scooping up in the wake of the Nasdaq bear-market swoon is furniture company Lovesac (NASDAQ: LOVE). While simply saying “furniture stock” is enough to put some investors to sleep, I can assure you this small-cap furniture company is nothing like its peers.
The clearest differentiator between Lovesac and other furniture companies can be seen in its products. Though it was originally known for its beanbag-styled chairs (“sacs”), approximately 90% of net sales now derive from sactionals, which are modular couches that can be rearranged a host of ways to fit most living spaces. Sactionals have an assortment of high-margin upgrade options and come with over 200 different cover choices. The yarn used in their production is made from recycled plastic water bottles. It’s a unique and highly functional product with no comparison.
Uniqueness does come with a price — and a purpose. Although sactionals are costlier than typical sectional couches, Lovesac is purposefully targeting a mid-to-high-earning consumer with its furniture. High earners are less likely to change their buying habits during modest recessions or above-average periods of inflation.
Another reason Lovesac has handily outperformed other furniture companies is its omnichannel sales platform. Despite having a brick-and-mortar presence in 40 U.S. states, it leans on online sales, pop-up showrooms, and partnerships with major retailers to improve brand visibility and increase sales. This omnichannel platform has reduced overhead expenses and lifted Lovesac’s operating margin.
Similar to PayPal, Lovesac is historically inexpensive. Shares can be had for 11 times forward-year earnings, which is cheap when considering that the company can more than triple its earnings per share over the next five years.
Alibaba
The third amazing growth stock you’ll regret not adding to your portfolio following the 2022 bear-market drop for the Nasdaq Composite is China-based e-commerce company Alibaba (NYSE: BABA). In spite of recently weak economic data out of China, the long-term growth story and valuation with Alibaba are impossible to ignore.
The first notable catalyst for Alibaba is the reopening of the Chinese economy following roughly three years of stringent COVID-19 lockdowns. Even though Chinese regulators ended the controversial zero-COVID mitigation strategy in December 2022, it’s taking time to work through persistent supply chain kinks. When the Chinese economy finds its stride, once more, Alibaba will undoubtedly benefit.
Investors should also appreciate Alibaba’s leading position in e-commerce. An expansive middle class in China means there’s a long growth runway for online retail sales. Alibaba’s Taobao and Tmall collectively account for 50.8% of e-commerce market share in one of the largest markets for consumption in the world.
Beyond e-commerce, Alibaba is making quite the name for itself in cloud computing. Tech analysis company Canalys pegged Alibaba’s share of China’s cloud-infrastructure services market at 34% during the first quarter of 2023. Cloud services are a substantially higher-margin and faster-growing segment than e-commerce.
To keep with the theme, Alibaba is cheaper than it’s ever been as a publicly traded company. Excluding restricted cash, it ended September with more than $78 billion in cash, cash equivalents, short-term investments, and equity securities. Backing its net cash out of the equation leads to a forward-year price-to-earnings ratio of just 5 for a company with a history of double-digit growth.
Starbucks
A fourth spectacular growth stock you’ll regret not buying in the wake of the Nasdaq bear-market dip is none other than world-leading coffee chain Starbucks (NASDAQ: SBUX). Even with higher labor expenses as a headwind, Starbucks possesses the competitive edges that make it a no-brainer buy.
One factor working in Starbucks’ favor is the return to normal following the worst of the COVID-19 pandemic. In addition to having more than 16,300 stores in the U.S., Starbucks has north of 6,800 stores in China. The reopening story in China is just as important for Starbucks as it is for companies like Alibaba.
Something else that stands out about Starbucks is the incredible brand loyalty of its customers. In particular, Starbucks closed out its fiscal 2023 (ended Oct. 1) with 32.6 million Rewards Members. While the company does offer its Rewards Members perks, such as free food or drink items on occasion, Rewards Members also tend to spend more per ticket and are likelier than non-Members to utilize mobile ordering. The latter expedites the ordering process and shortens lines in Starbucks’ stores.
Credit is also due to Starbucks’ management team for adapting to a challenging environment. The pandemic coerced the company to rethink its drive-thru lanes. Starbucks completely revamped its ordering board, bolstered its high-margin food offerings, and introduced video to make the drive-thru experience more personal.
Lastly, Starbucks makes a lot of sense from a valuation standpoint. Its forward price-to-earnings ratio of 19 is the lowest it’s been in at least a decade and doesn’t do justice to Wall Street’s consensus annualized-earnings growth forecast of nearly 17% over the next five years.
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Sean Williams has positions in Lovesac and PayPal. The Motley Fool has positions in and recommends Intuit, PayPal, and Starbucks. The Motley Fool recommends Alibaba Group and Lovesac and recommends the following options: short March 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
4 Spectacular Growth Stocks You’ll Regret Not Buying in the Wake of the Nasdaq Bear-Market Dip was originally published by The Motley Fool