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Bear Market Bargains: 2 Growth Stocks Down 58% (or More) to Buy Now

After weathering a rough April, many investors were hoping for a reprieve. But the market downturn has accelerated in May, fueled by the Federal Reserve’s decision to raise interest rates by a half percentage point, its most aggressive rate hike since 2000. As a result, the Nasdaq Composite has slipped deeper into bear market territory, and the growth stock-loaded index is now about 27.3% off its 52-week high.
Many individual stocks have been hit even harder. Shares of Shopify (NYSE: SHOP) and HubSpot (NYSE: HUBS) are down 78% and 58%, respectively. Those sell-offs hurt in the short term (Shopify is one of my largest holdings), but they also create buying opportunities.
Here’s what you should know about these two bear market bargains.
Image source: Getty Images.

1. Shopify
Shopify simplifies commerce. Its software helps merchants manage sales across physical and digital locations, including branded websites, online marketplaces, and social media. It also provides services like payment processing and financing. That broad utility has made Shopify the most popular e-commerce software vendor, both in terms of market presence and user satisfaction, according to the latest G2 Grid report. Better yet, Shopify-assisted companies accounted for 10.3% of U.S. e-commerce sales last year, second only to Amazon.
However, Wall Street was not happy with Shopify’s first-quarter report. Revenue growth decelerated to 22%, and the company posted negative free cash flow of $70 million.
Before you stop reading, consider this explanation: Shopify faced a tough top-line comparison, since it grew revenue 110% in Q1 2021, and that comparison was made even tougher by inflationary pressure on consumer spending. Additionally, Shopify is ramping up R&D and marketing spending to strengthen its competitive position. But with over $7 billion in cash and equivalents on the balance sheet, the company can afford to do that.
More importantly, Shopify’s performance over the last two years still looks quite impressive.

Metric

Q1 2020

Q1 2022

CAGR

Revenue (TTM)

$1.7 billion

$4.8 billion

67%

Free cash flow (TTM)

($107.1 million)

$253.7 million

N/A

Source: YCharts. TTM = trailing-12-months. CAGR = compound annual growth rate.
Shopify puts its addressable market at $160 billion, and it has embarked on an ambitious growth strategy to capitalize on that opportunity. Most notably, the company aims to democratize logistics with the Shopify Fulfillment Network (SFN), a system of U.S. warehouses currently under construction. To accelerate that project, Shopify just announced a $2.1 billion deal to acquire Deliverr, a company that already provides fulfillment and logistics services to merchants on Amazon, Walmart, and eBay.
In the short term, the SFN (and other growth initiatives) will be a headwind to margins. But in the long run, these initiatives promise to reinforce Shopify’s competitive edge. Deliverr’s inventory management software and partner network of warehouses, carriers, and last-mile providers will enable Shopify merchants to offer next-day or two-day delivery across the U.S.
After plunging 78%, the stock currently trades at 10 times sales, its cheapest valuation in the past five years. That makes Shopify an attractive long-term investment idea.
2. HubSpot
HubSpot specializes in customer relationship management (CRM) services. Its platform comprises a suite of productivity tools (or hubs) for sales, marketing, customer service, and operations. HubSpot also offers a content management system that makes it easy to build personalized web experiences. Collectively, its CRM suite helps clients attract leads, convert leads into customers, and build lasting relationships with those customers.
The company operates in a highly competitive industry, and it’s much smaller than CRM giant Salesforce. Even so, G2 Grid recently recognized HubSpot as the leader in marketing automation software, and as the runner-up in salesforce automation software. More importantly, despite that tough competition, HubSpot has managed to grow its business rapidly.

Metric

Q1 2020

Q1 2022

CAGR

Revenue (TTM)

$722.0 million

$1.414 billion

40%

Free cash flow (TTM)

$41.6 million

$188.1 million

113%

Source: YCharts. TTM = trailing-12-months. CAGR = compound annual growth rate.
In the recent quarter, HubSpot saw its customer base grow 26% to over 143,000, and the average subscription revenue per customer increased 12%. Management also noted that 24% of enterprise and professional customers now use three or more hubs. That uptick in adoption and spending hints at the sticky nature of HubSpot’s CRM suite.
Looking into the future, the company still has room to grow. Bank of America analyst Brad Sills puts its addressable market at $87 billion, and HubSpot’s capacity for innovation should help it capitalize on that opportunity. The company recently redesigned its Services Hub, a move that management believes will drive further multi-hub adoption. It also launched HubSpot Payments, a tool that streamlines commerce by integrating digital payments into its CRM platform.
More broadly, businesses that hope to succeed in an increasingly digital world must maintain customer loyalty, and that’s HubSpot’s specialty. With that in mind, this beaten-down growth stock trades at 12.9 times sales, a bit cheaper than its five-year average of 14.7 times sales. That’s why now is a good time to buy.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon and Shopify. The Motley Fool has positions in and recommends Amazon, HubSpot, Salesforce.com, and Shopify. The Motley Fool recommends eBay and recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy. –

After weathering a rough April, many investors were hoping for a reprieve. But the market downturn has accelerated in May, fueled by the Federal Reserve’s decision to raise interest rates by a half percentage point, its most aggressive rate hike since 2000. As a result, the Nasdaq Composite has slipped deeper into bear market territory, and the growth stock-loaded index is now about 27.3% off its 52-week high.

Many individual stocks have been hit even harder. Shares of Shopify (NYSE: SHOP) and HubSpot (NYSE: HUBS) are down 78% and 58%, respectively. Those sell-offs hurt in the short term (Shopify is one of my largest holdings), but they also create buying opportunities.

Here’s what you should know about these two bear market bargains.

Image source: Getty Images.

1. Shopify

Shopify simplifies commerce. Its software helps merchants manage sales across physical and digital locations, including branded websites, online marketplaces, and social media. It also provides services like payment processing and financing. That broad utility has made Shopify the most popular e-commerce software vendor, both in terms of market presence and user satisfaction, according to the latest G2 Grid report. Better yet, Shopify-assisted companies accounted for 10.3% of U.S. e-commerce sales last year, second only to Amazon.

However, Wall Street was not happy with Shopify’s first-quarter report. Revenue growth decelerated to 22%, and the company posted negative free cash flow of $70 million.

Before you stop reading, consider this explanation: Shopify faced a tough top-line comparison, since it grew revenue 110% in Q1 2021, and that comparison was made even tougher by inflationary pressure on consumer spending. Additionally, Shopify is ramping up R&D and marketing spending to strengthen its competitive position. But with over $7 billion in cash and equivalents on the balance sheet, the company can afford to do that.

More importantly, Shopify’s performance over the last two years still looks quite impressive.

Metric

Q1 2020

Q1 2022

CAGR

Revenue (TTM)

$1.7 billion

$4.8 billion

67%

Free cash flow (TTM)

($107.1 million)

$253.7 million

N/A

Source: YCharts. TTM = trailing-12-months. CAGR = compound annual growth rate.

Shopify puts its addressable market at $160 billion, and it has embarked on an ambitious growth strategy to capitalize on that opportunity. Most notably, the company aims to democratize logistics with the Shopify Fulfillment Network (SFN), a system of U.S. warehouses currently under construction. To accelerate that project, Shopify just announced a $2.1 billion deal to acquire Deliverr, a company that already provides fulfillment and logistics services to merchants on Amazon, Walmart, and eBay.

In the short term, the SFN (and other growth initiatives) will be a headwind to margins. But in the long run, these initiatives promise to reinforce Shopify’s competitive edge. Deliverr’s inventory management software and partner network of warehouses, carriers, and last-mile providers will enable Shopify merchants to offer next-day or two-day delivery across the U.S.

After plunging 78%, the stock currently trades at 10 times sales, its cheapest valuation in the past five years. That makes Shopify an attractive long-term investment idea.

2. HubSpot

HubSpot specializes in customer relationship management (CRM) services. Its platform comprises a suite of productivity tools (or hubs) for sales, marketing, customer service, and operations. HubSpot also offers a content management system that makes it easy to build personalized web experiences. Collectively, its CRM suite helps clients attract leads, convert leads into customers, and build lasting relationships with those customers.

The company operates in a highly competitive industry, and it’s much smaller than CRM giant Salesforce. Even so, G2 Grid recently recognized HubSpot as the leader in marketing automation software, and as the runner-up in salesforce automation software. More importantly, despite that tough competition, HubSpot has managed to grow its business rapidly.

Metric

Q1 2020

Q1 2022

CAGR

Revenue (TTM)

$722.0 million

$1.414 billion

40%

Free cash flow (TTM)

$41.6 million

$188.1 million

113%

Source: YCharts. TTM = trailing-12-months. CAGR = compound annual growth rate.

In the recent quarter, HubSpot saw its customer base grow 26% to over 143,000, and the average subscription revenue per customer increased 12%. Management also noted that 24% of enterprise and professional customers now use three or more hubs. That uptick in adoption and spending hints at the sticky nature of HubSpot’s CRM suite.

Looking into the future, the company still has room to grow. Bank of America analyst Brad Sills puts its addressable market at $87 billion, and HubSpot’s capacity for innovation should help it capitalize on that opportunity. The company recently redesigned its Services Hub, a move that management believes will drive further multi-hub adoption. It also launched HubSpot Payments, a tool that streamlines commerce by integrating digital payments into its CRM platform.

More broadly, businesses that hope to succeed in an increasingly digital world must maintain customer loyalty, and that’s HubSpot’s specialty. With that in mind, this beaten-down growth stock trades at 12.9 times sales, a bit cheaper than its five-year average of 14.7 times sales. That’s why now is a good time to buy.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon and Shopify. The Motley Fool has positions in and recommends Amazon, HubSpot, Salesforce.com, and Shopify. The Motley Fool recommends eBay and recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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