Many stocks have tumbled recently. Most recently, this has included several travel stocks, prompted by investor fears about the Omicron variant. But I’m more tempted by the beaten-down growth stocks. These have mainly fallen due to extremely high levels of inflation and slightly disappointing trading updates. Here’s one that I think is set to soar over the long term, and one that I’m staying well away from.
Buy the dip
Over the past month, Salesforce (NYSE: CRM) has fallen around 12%. This was mostly due to its trading update on Tuesday evening, where the forward guidance was rather underwhelming. Indeed, for Q4, the company expects revenues of around $7.3bn, yet earnings were forecasted to be slightly lower than analysts’ expectations. This had led to fears that growth is slowing, and this caused the Salesforce share price to fall around 10% on the day. It’s still up over 18% over the past year though.
But while the prospect of slowing growth is a real risk for the company, I still think this dip offers a great time to buy. In fact, the company’s Q3 trading update did beat expectations, and full-year revenue is expected to be around $26.4bn. This is a 24% year-on-year rise, once again showing how the company’s strategy is paying off. After the acquisition of Slack, and due to the strength of its Customer 360 platform, it also expects revenue of $50bn by FY2026.
This means that, after the company’s recent drop, and based on the recent results, it has a price-to-sales ratio of under 10. For a growth stock, this is certainly not too expensive. If the company can deliver on its ambition to reach $50bn in revenues by 2026, the share price could soar. Therefore, I’m very tempted to add Salesforce stock to my portfolio.
A growth stock to stay away from?
Snap (NYSE: SNAP) has fallen back significantly over the past few months, as it missed estimates for revenue growth. This means that the Snap share price is over 40% off its recent high, and at the same price as it was a year ago. But this dip isn’t tempting me to buy.
Although Snap has been seeing tremendous growth over the past few years, there are signs this is slowing down. Daily active users in Q3 were 306m, which is a 23% increase year-on-year. But over 75% of 13-34-year-olds in the US, UK, Australia, France, and the Netherlands already use Snapchat, so I believe that it will be hard to attract too many new users. This is a bad sign for any growth stock.
Further, the company’s valuation seems very steep. In fact, using the company’s estimates of around $4bn of revenue for this financial year, it has a forward price-to-sales ratio of around 19. This is far higher than I would like, especially as it still has not managed to reach profitability.
Therefore, even though the company is continuing to invest in itself, and revenue growth is strong, I don’t think this justifies its lofty valuation. This means that Snap is a beaten-down growth stock I won’t be adding to my portfolio.
Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended Salesforce.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.