- Etsy (ETSY): Valuation looks attractive after a deep correction. Healthy growth in GMS volume and active buyers on the platform.
- XPeng (XPEV): Correction on near-term headwinds provides a good accumulation opportunity. Healthy deliveries growth on the back of new model launches coupled with international expansion.
- Roblox (RBLX): Looks attractive as one of the best metaverse plays. Growth decelerating on a relative basis has triggered market overreaction.
- Riot Blockchain (RIOT): Tripling of mining capacity in the next few quarters would imply robust revenue and EBITDA growth. Returns can be multi-fold if Bitcoin trends higher.
- Teladoc (TDOC): Slowdown post-pandemic in virtual healthcare is a concern. However, telehealth has a big addressable market and the stock has discounted relatively lower growth as the new normal.
- DraftKings (DKNG): Big market potential for online sports betting and iGaming in the U.S. Cash burn remains a concern even as growth is robust. However, correction has been steep and the stock seems poised for a reversal.
- Sea Limited (SE): Remains an attractive e-commerce play for exposure to the high-growth Southeast Asian market. Current levels are attractive for fresh exposure.
Even after some correction, the S&P 500 index still trades at a cyclically adjusted price-to-earnings-ratio of 36.3. However, this does not imply that there are no undervalued stocks to buy. Investors can still use the bottom-up approach to pick value stocks.
Policymakers reacted to the pandemic induced recession with ultra-expansionary monetary policies. This translated into one of the best phases for high-growth stocks with multi-fold returns in dozens of names.
Things seem to have changed in the last few months. There have been multiple concerns for the markets, which has impacted growth stocks. These concerns include inflation, possibility of multiple rate hikes and growth deceleration for some sectors in a post-pandemic scenario. Additionally, there are concerns related to a possible recession in the U.S. in 2023.
With the markets discounting these factors, there has been an over-reaction in several high-growth stocks. This does not come as a surprise for high-beta names.
While it’s important to remain cautious, I would consider gradual exposure to some undervalued stocks. In particular, stocks of companies that have a robust business model and have been a victim of market over-reaction.
Let’s talk about seven undervalued stocks to buy for the medium to long-term.
Undervalued Stocks: Etsy
In November 2021, Etsy (NASDAQ:ETSY) stock had touched highs of $307.8. Growth concerns related to the company’s post-pandemic performance has translate into a deep correction. At levels of $98 and at a forward price-to-earnings-ratio of 30.2, ETSY stock is among the undervalued stocks to buy.
For 2021, Etsy reported revenue growth of 35% on a year-on-year basis to $2.3 billion. For the same period, the company reported adjusted EBITDA growth of 30.5% to $717 million. However, for Q1 2022, the company’s top-line growth will remain subdued on a y-o-y basis. I believe that this factor is already discounted in the stock.
It’s worth noting that there has been a sustained growth in the number of active buyers and sellers on the company’s platform. Further, the percentage of non-U.S. gross merchandise sale has been increasing. With a global addressable market, Etsy has ample scope for growth. These are positive metrics from a long-term perspective.
For 2021, the company’s 35% revenue growth was driven by GMS volume, Etsy ads and the positive impact of acquisitions. As the number of buyers and sellers swell, Etsy ads growth is likely to sustain. As of December 2021, Etsy reported cash and equivalents of $985 million. The company also generated operating cash flow of $652 million for 2021. Therefore, there is ample financial flexibility to pursue aggressive organic and inorganic growth.
Even with sectors that have multi-year tailwinds, there can be a case for near-term challenges. This holds true for the electric vehicle segment. Factors such as chip shortage and raw-material price escalation have impacted sentiments. Specific to China, covid impact is likely to production loss for the automobile industry.
These near-term headwinds provide a good entry opportunity into quality EV stocks. XPeng (NYSE:XPEV) would be in my list of undervalued stocks to buy from the Chinese EV segment. After a downside of 20% in the last 12-months, the stock seems attractive for the long-term.
For Q1 2022, XPeng reported 159% increase in vehicle deliveries on a year-on-year basis to 34,561. The positive impact of P5 sedan, which was launched in October 2021, is likely to be seen through 2022. Furthermore, XPeng will commence commercial deliveries of G9 SUV in Q3 2022. This will also boost deliveries growth.
XPeng is also making inroads into the international markets with focus on Europe. With cash and equivalents of $6.8 billion as of December 2021, the company is positioned for aggressive international expansion.
It’s also important to mention that with operating leverage, XPeng is positioned for gradual improvement in vehicle margin. Once cash flows accelerate, XPEV stock will be positioned for meaningful upside.
Undervalued Stocks: Roblox
From highs of $141.6, the decline for Roblox (NYSE:RBLX) stock has been unabated. At current levels of $34, I would consider exposure to this undervalued growth stock.
Recently, Goldman downgraded RBLX stock to neutral rating with expectations of a post-pandemic slowdown. Even after the downgrade, Goldman has assigned a price target of $50 for the stock. This would imply an upside potential of 35%. Clearly, the stock is undervalued even after discounting the slowdown concerns.
Beyond the near-term concerns, Roblox is possibly the best metaverse play. It’s expected that the metaverse market will swell to $783.3 billion by 2024. This provides Roblox with ample growth opportunities in a global addressable market.
It’s worth mentioning here that Roblox last reported metrics for February 2022. Daily active users were 55.1 million and increased by 28% on a y-o-y basis. Revenue growth for the month is estimated in the range of 60% to 63%. Even with a relative slowdown, the metrics look attractive.
For 2021, Roblox had reported 108% revenue growth on a y-o-y basis. Assuming that annual growth metrics are similar to February 2022, the company is positioned for top-line growth of 60%. Deceleration in growth seems to have been more than discounted in the deep correction.
Bitcoin (BTC-USD) has been trading in a broad consolidation zone. However, with growing adoption of cryptocurrencies and a limited supply of Bitcoin, the outlook remains positive.
Riot Blockchain (NASDAQ:RIOT) is among the undervalued stocks to buy with the best part of growth still to come. The Bitcoin miner has under-performed with a downside of 69% in the last 12-months.
One reason for the downside is equity dilution. Further, Bitcoin has declined meaningfully from all-time highs. The steep correction in RIOT stock seems like a good accumulation opportunity.
For March 2022, Riot reported mining of 511 Bitcoin. On a year-on-year basis, the number of Bitcoins mined increased by 176%. For the same period, the company reported hash-rate capacity of 4.3EH/s.
The key point to note is that Riot expects to boost capacity to 12.8EH/s by January 2023. With tripling of capacity, Riot is poised for robust growth in the next 12-24 months.
For 2021, Riot reported revenue of $213.2 million and adjusted EBITDA of $82.4 million. This implies an adjusted EBITDA margin of 39%. If Bitcoin trends higher in the next few quarters, Riot will be positioned to deliver healthy cash flows.
Undervalued Stocks: Teladoc
With the pandemic triggering demand for virtual healthcare, Teladoc (NYSE:TDOC) stock had surged to highs of $291 in February 2021. However, the markets have severely punished TDOC stock on growth and profitability concerns. The stock currently trades below $60 and seems is among the undervalued stocks to buy.
For 2021, Teladoc reported revenue growth of 86% to $2 billion. However, for the current year, the company has guided for revenue growth in the range of 25% to 30%. A significant deceleration in growth however seems to be discounted in the stock price.
Even the most bearish analyst has a 12-month forward price target of $60 for the stock. I would therefore bet on a reversal rally from current levels.
One point to note is that the global telehealth market is expected to swell to $636.38 billion by 2028. Through this period, the industry growth is likely at a CAGR of 32.1%. Even if Teladoc top-line growth is in-sync with the industry average, there is potential for EBITDA and cash flow upside. It’s just that the markets have discounted a relatively lower growth trajectory for the company.
Another important point is that Teladoc revenue is largely from the U.S. However, international revenue growth has been decent. With ample financial flexibility, the company has the potential to accelerate international revenue and cater to a bigger addressable market.
DraftKings (NASDAQ:DKNG) is an undervalued growth stock where I am willing to take a small contrarian bet. With a downside of 76% in the last 12-months, the selling in DKNG stock has been unabated.
However, at a market capitalization of $6.1 billion, the business looks attractive. For 2021, DraftKings reported revenue of $1.3 billion. The stock is therefore trading at 5x revenue.
This seems attractive considering the point that the online sports betting and iGaming market in North America is estimated at $67 billion to $80 billion.
One reason for the stock slump is the massive cash burn. For 2021, DraftKings reported adjusted EBITDA loss of $676 billion. However, DraftKings is still at an early growth stage with steady improvement in average revenue per monthly unique payer.
As more states legalize and regulate sports betting and iGaming, the growth outlook is robust. The decline in the stock has also been due to fears of significant decline in OSB and iGaming demand after the pandemic. It remains to be seen if growth remains healthy.
However, in any case, DKNG stock looks oversold. I would take a medium-term position at current levels. A short squeeze and a quick rally of 15% to 20% seems entirely likely.
Undervalued Stocks: Sea Limited
Sea Limited (NYSE:SE) is a fallen angel from the e-commerce sector. From October 2021 highs of $372, the stock has collapsed to current levels of $93.
There are few reasons for the sharp correction. First and foremost, the markets have discounted growth deceleration. Furthermore, Sea Limited continues to report significant EBITDA level loss from the e-commerce sector. Even as the gaming segment EBITDA remains healthy.
Recently, the company’s e-commerce unit, Shopee, exited India. This seems like a good decision from the perspective of cost control. If EBITDA margin in the e-commerce segment improves, SE stock is poised for a sharp reversal rally.
It’s worth noting that the company operates in the high-growth Southeast Asian e-commerce market. Also, the company’s digital financial services have been gaining growth traction.
For 2022, Sea Limited expects e-commerce revenue of $9.0 billion. On a y-o-y basis, revenue is expected to increase by 75.7%. The digital financial services growth is expected at 155.4% on a y-o-y basis. Clearly, it seems that top-line growth is not a major concern. It’s profitability concerns that have resulted in a sustained correction.
However, the correction seems overdone. This view is underscored by the fact that 28 analysts have a median 12-month forward price forecast of $200 for the stock. This would imply more than 100% upside from current levels.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.