3 Growth Stocks to Consider on the Dip

Recent weakness in these three growth stocks is a long-term opportunity

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Growth stocks have been hammered over the past several months. Investors have been spooked by the Federal Reserve tightening at the same time that higher rates are already dampening big-ticket demand (see falling auto and housing stocks), and escalating trade tensions between the U.S. and China are causing input costs to rise and corporate margins to fall. Overall, this combination of slowing growth and rising costs with the threat of further tightening on the horizon has investors cautious about forward growth projections.

When investors get cautious about forward growth projections, they tend to sell growth stocks, which derive most of their value from those forward growth projections. As such, growth stocks have been killed over the past few months.

This selloff has been broad. Across the entire Nasdaq, which comprises most of the high growth tech names, only 43% of stocks are above their 200-day moving averages. In early August, more than 70% of Nasdaq stocks were above their 200-day moving averages.

In other words, no growth stocks have been spared from this recent selloff. But, this indiscriminate selling of growth stocks has created an opportunity. While the outlook for some growth stocks has weakened substantially, the outlook for other growth stocks remains robust. But, all growth stocks have been killed recently. Thus, in the wreckage of this recent selloff, there are some opportunities.

With that in mind, here’s a list of three growth stock to consider on this recent dip:

Shopify (SHOP)

The first stock on this list is hyper-growth e-commerce enabler Shopify (NYSE:SHOP). Shopify stock currently trades about 20% off recent highs. But, the weakness has more to do with broad tech sector concerns that a deterioration in the fundamentals underlying Shopify. If anything, those fundamentals are actually as strong as ever.

Amid the October selloff, Shopify reported a robust double-beat-and-raise third-quarter earnings report which underscored that nothing is worsening about this company’s underlying growth narrative. Revenues topped expectations and rose by a whopping 58% year-over-year, versus 62% growth in the previous quarter. Meanwhile, gross merchandise value rose 55% in the quarter, versus 56% growth last quarter, and gross merchandise value growth outpaced subscription solutions growth, which implies that each merchant on Shopify’s platform is seeing higher sales.

Meanwhile, earnings came in above expectations, too, and were positive on an adjusted basis for the second quarter in a row. This company is now proving itself to be consistently positive, and the whole “big revenue growth should drive big opex leverage and big margin expansion” narrative is now starting to play out.

Overall, Shopify’s third-quarter numbers were really good. Broadly speaking, they underscore that digital commerce is becoming increasingly democratized and that, as this democratization process plays out, retailers of all shapes and sizes will migrate to the digital channel. As they do, they will require tools to power their e-retail operations. Shopify will provide those tools, and as such, demand for Shopify’s suite of products will remain robust over the next several years.

The valuation on Shopify stock does price a lot of this in already. But, I see a pathway for this company to continue to grow share in the global commerce market, and one day is a $100 billion company. The current valuation is just $15 billion, so long-term upside remains compelling despite valuation concerns.

SFIX Stock Would Be a Winner If Technology Was the Only Concern
Source: Stitch Fix

Stitch Fix (SFIX)

The second stock on this list is personalized online apparel company Stitch Fix (NASDAQ:SFIX). SFIX stock had been a market darling for most of 2018 following its late 2017 IPO. But, the Cinderella run hit a major speed-bump recently after the company reported middle-of-the-road fourth-quarter numbers which didn’t justify the stock’s massive year-to-date rally. SFIX stock dropped. In a big way. It currently trades about 45% off recent highs.

This huge dip looks like a buying opportunity. What you have is a freshly public stock with huge growth prospects that went red hot after its IPO. Then, you had the not-so-great quarter, and post-IPO enthusiasm disappeared. The stock dropped back in a big way to more reasonable levels. Sometimes, this post-IPO normalization is the beginning of a bigger downtrend. See Fitbit (NYSE:FIT) or GoPro (NASDAQ:GPRO). Other times, this post-IPO normalization is a golden buying opportunity. See Twilio (NASDAQ:TWLO) or Square (NYSE:SQ).

When it comes to SFIX stock, I see the Twilio and Square comp more than the Fitbit and GoPro comp. Stitch Fix is revolutionizing the e-retail model to be more efficient through the use of data-driven and people-powered curation. This model should ultimately gain significant share over the next several years due to its cost, time, and hassle benefits. Stitch Fix is the pioneer of this model and the current leader in the space. Thus, as the personalized shopping model gains share over the next several years, Stitch Fix should also gain share.

The long-term upside thesis is predicated on the fact that the global apparel market is huge ($1.7 trillion) and Stitch Fix is only tapping a small portion of that market ($1.2 billion). Thus, this company has a long runway to grow revenues by leaps and bounds through steady market share expansion over the next several years. Meanwhile, the company operates at healthy 40-50% gross margins, so big revenue growth should inevitably drive opex leverage and result in healthy operating margins.

Altogether, I think Stitch Fix has an opportunity to be a $10 billion company one day. The current valuation hovers around $3 billion. Thus, long-term upside looks compelling, and recent weakness looks like an opportunity.

Chegg (CHGG)

The third stock on this list is digital education and connected learning company Chegg (NYSE:CHGG). Chegg has many parallels with Shopify. Just as Shopify is enabling a new era of democratized digital shopping, Chegg is enabling a new era of democratized digital learning. Just as Shopify stock has dropped 20% off its recent highs despite reporting robust Q3 numbers which underscored still healthy growth fundamentals, Chegg stock, too, has dropped 20% off recent highs despite reporting robust Q3 numbers which underscore still healthy growth fundamentals in the digital learning space.

In the near-term, then, this recent selloff looks like an opportunity. Strong Q3 numbers imply this stock’s fundamentals remain strong. Thus, once near-term indiscriminate selling ends, investors will see opportunity in Chegg, and the stock should bounce back.

But, my bullishness on Chegg stock has more to do with the long-term growth thesis than the near-term recovery thesis. During the past two years, this student-first education company has pivoted from renting out textbooks and study materials, to running a connected learning platform with high-margin software revenues. In so doing, the company has made itself a long-term winner. Chegg is providing services that high school and college students across America need, like homework help and tutors, and is doing so through a relevant, digital, and on-demand learning platform.

Meanwhile, competition is next to nothing. Brand awareness is high. Margins are high. The addressable market is big. The current penetration rate is low. Growth is big and steady.

There are a lot of reasons to like CHGG stock here and now. Long term, I think Chegg morphs into a must-have digital study companion for most high school and college students across America. If that happens, I think this stock has doubling potential in a long-term window.

As of this writing, Luke Lango was long SHOP, SFIX, SQ and CHGG.

Article printed from InvestorPlace Media, https://investorplace.com/2018/11/3-growth-stocks-to-consider-on-the-dip/.

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