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In many ways, 2022 was a year like no other — and not in a good way. Supply chain issues resulting from COVID-19, high inflation, rising interest rates, and the worst year on Wall Street since the Great Recession wreaked havoc on investor portfolios.
All three major market indexes plunged last year, but the Nasdaq Composite has the dubious distinction of being hit the hardest, remaining firmly entrenched in bear market territory, still down 33% from its late 2021 peak. Unfortunately, many high-growth stocks have fared even worse with some suffering their worst market performance ever.
For investors who like to see the glass as half-full, there is good news. History shows that previous market declines have been the absolute best time to buy quality companies at discounted prices. Furthermore, each and every previous bear market has paved the way for a bull market to follow.
Image source: Getty Images.
With that as a backdrop, let’s look at three top growth stocks that lost more than 60% of their value in 2022, setting the stage for stunning rebounds.
In this day and age, shoppers don’t think twice about buying goods and services online, but PayPal (PYPL -0.38%) was the progenitor of digital payments. Yet, this didn’t help insulate the godfather of fintech from the effects of the uncertain economy.
PayPal’s third-quarter results help illustrate the challenges the company faced. Revenue grew 11% year over year, while its earnings per share (EPS) climbed 26%. Total payment volume (TPV) climbed 14% in constant currency as the company added 2.9 million active accounts, up just 4%. That’s in stark contrast to the 24% and 13% active-account growth the company reported in 2020 and 2021, respectively.
But PayPal’s engagement did tick higher, delivering 50.1 transactions per active account on a trailing-12-month basis, up 13%. Active accounts now number 432 million, which is impressive by any measure.
Finally, its campaign of cost-cutting is bearing fruit, expected to add $900 million to the bottom line in 2022.
PayPal has pivoted in response to the macroeconomic headwinds, which caused low-income consumers to pull back on spending. Rather than stick stubbornly to its previous strategy of increasing active accounts at all costs, the company is focusing on key priorities like increasing engagement and boosting the average revenue per user (ARPU), thereby making existing users even more profitable. This should help PayPal rebound nicely when the economy bounces back.
It also helps to step back and take a broader view. As a leading provider of digital payments and fintech services, PayPal is well positioned to benefit from a largely fractured but fast-growing market. While estimates vary, worldwide digital payments were expected to top $9.5 trillion in 2022 and should climb to nearly $15 trillion by 2027, according to Statista. For context, PayPal generated TPV of $1.34 trillion in the past four quarters, giving the company a long runway for growth ahead.
There’s a well-documented phenomenon in the annals of marketing: When economic uncertainty pops up, companies do their very best to rein in spending — starting with the advertising line on the income statement. The reason? Ad spending is an item that’s easy to dial down or ramp up in response to changing circumstances. And that’s what Meta Platforms (META 0.20%) is facing now.
In fact, for the first time in the company’s history, the Facebook parent has reported back-to-back quarters of year-over-year revenue declines. However, it isn’t like the results fell off a cliff.
Second-quarter revenue declined 1%, while third-quarter revenue sank 4% — but even that doesn’t tell the whole story. Had it not been for the strong dollar and its impact on foreign-exchange rates, revenue in the second and third quarter would have increased by 3% and 2%, respectively. Modest, yes, but increases nonetheless.
And it’s likely that there’s still more pain in store for Meta Platforms investors — that is, until the economy reaches a more even keel.
Yet with more than 2.93 billion people visiting its social media empire every day and 3.71 billion checking in every month, Meta Platforms has a powerful network effect and an audience that marketers simply can’t ignore. That’s why the company remains the world’s second-largest digital advertiser by revenue, second only to Alphabet‘s Google.
This means that when advertising budgets bounce back — which they no doubt will — Meta Platforms will bounce back with it, taking investors along for the ride.
Like many disruptive companies with high valuations, electric vehicle maker Tesla (TSLA -0.94%) was caught in the undertow of falling stock prices brought on by the bear market. Yet over the past couple of months, Tesla stock has fallen another 50%. Two factors — driven by investor sentiment — are playing a big part in the recent move, which could reverse course just as quickly.
First, there’s the matter of CEO Elon Musk’s acquisition of Twitter. The on-again, off-again deal made plenty of headlines. With Musk taking the helm of Twitter, investors are justifiably concerned the enigmatic leader might be distracted and therefore not as effective at steering Tesla as he might otherwise be.
However, various reports suggest that Twitter and Musk are “actively searching” for a new CEO, adding credence to Musk’s assertion that his time helming Twitter will be temporary.
Equally concerning for investors were Tesla’s fourth-quarter delivery numbers, which were something of a disappointment, though understandable, given the overall state of the economy. The company said it delivered 405,278 vehicles, falling short of Wall Street’s expectation for 427,000 deliveries. Yet even in a challenging economic climate, Tesla deliveries still rose 40% in 2022, a remarkable achievement for a luxury automaker.
An important factor weighing on the results were multiple pandemic-related shutdowns of its Shanghai production facility. The most recent manufacturing halt came in late December as the company faced a COVID outbreak among staff and suppliers, potentially impacting its year-end delivery results.
That said, both issues are decidedly short term in nature. This suggests that when a CEO has been found for Twitter and Tesla’s deliveries improve, the stock is set to regain lost ground.
In the five years leading up to Nov. 2021, these companies were truly exceptional growth stocks. Tesla had gained over 3,000%, while Meta Platforms and PayPal were up 155% and 457%, respectively. Despite their more than 60% declines last year, each is still an undisputed leader in its industry, setting the stage for remarkable rebounds once the economy improves.
Finally, even after their spectacular declines, these stocks are still selling at a slight premium. Tesla, PayPal, and Meta Platforms are all trading at about 2.6 times forward sales estimates, when a typical price-to-sales ratio is between 1 and 2. That said, given their industry-leading positions and potential for future growth, each is deserving of a premium valuation.
Investors who buy these stocks now will no doubt be happy when they look back three to five years from now.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Meta Platforms, PayPal, and Tesla and has the following options: long January 2024 $95 calls on PayPal. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, PayPal, and Tesla. 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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