Despite some attempts of recovery, the rout among growth stocks has continued in recent weeks. This is due to the rising cost of living in society and the consequent rising interest rates.
Rising inflation lowers the value of the future cash flows of companies, while also reducing the discretionary income available for consumers. These are major issues for growth stocks.
Rising interest rates also makes it more expensive to issue debt, which can stunt the growth of these companies. Therefore, the Nasdaq, an index that consists mainly of growth stocks, has sunk over 25% year-to-date and over 16% in the past year.
This has also caused significant disruption in my portfolio. But instead of panicking, I see several opportunities to buy. Here are two companies that I feel look too cheap at current prices.
A Latin American e-commerce giant
MercadoLibre (NASDAQ: MELI) stock soared during the pandemic, as the transition to e-commerce in Latin America quickened. However, the post-pandemic performance of the company has been far worse, and since its highs in February 2021, the MercadoLibre share price has fallen over 60%. In the past year, it has fallen around 44%, in line with many other growth stocks. I believe the sell-off has now been overdone.
For one, financial results have continued to impress. In the first quarter of 2022, net revenues were able to soar around 67% to $2.2bn, while income also equalled $139m. These beat expectations, demonstrating that the company’s post-pandemic future remains extremely bright. Further, this has left MercadoLibre exceptionally cheap, in comparison to its historical prices. For instance, it currently trades on a forward price-to-sales (P/S) ratio of under 4, whereas last year the P/S ratio exceeded 10.
However, this sell-off has reflected the macroeconomic uncertainties and the slow-down in e-commerce. Recently, Citigroup also noted that as the group continues to grow its fintech business, it can expect more loan losses on credit cards, which could hurt profit margins. But while this is a risk, I am still encouraged in the growth of the fintech business. This is because it offers another diversified source of revenues. Therefore, at current prices, I will continue to add more MercadoLibre shares to my portfolio.
An even more beaten-down growth stock
If you thought MercadoLibre stock has been considerably beaten down, the PayPal (NASDAQ: PYPL) share price chart looks even worse. Indeed, it has now fallen nearly 70% in the past year, making it among the worst-performing growth stocks around. This poor performance is due to evidence of slowing growth.
But there are several reasons why I am tempted to buy more PayPal shares at current prices. For example, although growth has slowed, Q1 revenues were still able to climb 8% and they are expected to climb 12% in 2022. These seem very realistic targets. In addition, the fintech is now attempting to cut costs, which will hopefully equate to rising profits. Nonetheless, with a price-to-earnings ratio of under 30, I feel that investors are not expecting any considerable profit growth. This indicates that PayPal stock may have dipped too far.
Therefore, although I am slightly concerned at the rising competition in the fintech space, I am likely to still add more PayPal shares to my portfolio.
