It has not been a rewarding time to own many of the world’s leading growth shares. Over the past year, for example, shares in Amazon have fallen 46% in a year, while Meta stock is down 66%.
Just because shares fall a long way does not mean they are a bargain. They can still be overpriced. However, I am starting to think that some growth shares could turn out to be bargain buys for my portfolio in the coming year. Here is why.
What growth shares really are
Buying into a company is like buying into an expectation, or at least a hope, of financial return.
That can take a few different forms. Many shares in well-established businesses are a way of exposing one’s portfolio to a fairly predictable earnings stream. For example, I own shares in asset manager Jupiter. It has a well-established business and is profitable, paying me dividends for owning the shares. Right now, Jupiter faces risks such as customers withdrawing assets. So in years to come, the business may actually get smaller, not larger.
Contrast that to a typical growth share. Such companies may not yet be profitable – and indeed may remain so for many years yet, perhaps forever. But the idea is that by buying a stake in the company now, I can benefit from any success it has in the future.
In both cases, valuation matters. Ultimately I am hoping to make a financial return on my investment. The higher the valuation a share has, the better the business will need to perform in future for me to have any chance of meeting that goal.
Looking at valuations
So, now that many growth shares have come crashing down, are their valuations attractive enough for me to consider adding them to my portfolio?
There is no single answer to this – it depends on the share in question.
What is interesting about the crash in the valuation of many growth shares over the past year, however, is that it has affected some businesses that are already well-established and highly profitable. Meta is an example. Another is Google parent Alphabet. Its shares have tumbled 36% in 12 months.
In such cases, I am not forced to try and guess whether a company will break into the black in future. Instead, I can invest in companies like Alphabet that are already solidly profitable.
Hunting for bargains
Alphabet’s current valuation is attractive to me for a business of its quality. If I had spare cash in my portfolio, I would buy the shares today.
As investors fret about the impact of reduced consumer spending on the business model of some tech companies, I think growth shares may continue to struggle as we head into 2023. Fundraising is getting harder, so revenues and earnings become more important. That could mean more growing companies struggle and their share prices fall.
I already see some possible bargains for my portfolio and reckon more may appear over the coming year. I will be keeping a keen eye out for undervalued growth shares to buy in 2023! I think they could turn out to be the year’s big bargains.
