Insights

Should You Really Be Buying Beaten-Down Growth Stocks Right Now?

Bear markets are scary times to be investing, but investors willing to pick up discounted shares while uncertainty is high are setting themselves up for big gains down the road. Let’s examine a few arguments in favor of sitting out on growth stocks until the bear market resides and a few in favor of continuing to buy them.

The case for staying on the sidelines 

The most straightforward reason investors might want to stop buying growth stocks right now is that the bear market is absolutely brutal to their share prices. Take the biotech stocks Ginkgo Bioworks (NYSE: DNA) and Bionano Genomics (NASDAQ: BNGO): In the last 12 months, Gingko’s shares have collapsed by 70%, and Bionano’s crumbled by a similarly terrible 62%.

Neither company had much of anything in the way of bad news. Gingko has spent the year forging a smattering of new collaborations and making new acquisitions that’ll yield revenue in the near term, and its total revenue grew by 282% year over year to reach $168 million in the first quarter. That means its bioengineering-and-cellular-manufacturing-as-a-service business model is seeing continued uptake among other biotech and pharmaceutical companies, though it remains unprofitable for now.

For Bionano Genomics’ part, its Saphyr genome mapping devices are being adopted worldwide. The company should hit around 240 systems installed globally before the end of the year, and the average of three analyst estimates calls for it to bring in $26.2 million in sales for 2022, or a 45.7% year over year increase. What’s more, those same analysts expect its pace of expansion to increase to 86% in 2023.

So, what’s with the market being so pessimistic about these two stocks if both are performing well? In short, growth stocks are heavily disfavored in the context of the current bear market because investors expect the Federal Reserve to keep hiking interest rates, thereby making it more expensive for companies to borrow money.

Businesses that are expected to grow a lot are the same ones that might be hit by increases in borrowing costs the most. Plus, unprofitable companies that struggle to borrow cheaply might get washed out altogether. All of the above is why many investors are choosing not to buy shares of growth stocks right now.

The case for buying the dip

The trouble with the above analysis is that it’s short-term thinking at a time when investors should be focusing on the long term (and that time is always). Bionano Genomics and Ginkgo Bioworks are in the earlier innings of their growth stories. While it’s true that the bear market could drive their share prices down even more for people who buy shares today, there’s also the reality that the bear market will eventually reside and give way to a rally. More importantly, the pair will continue to build on their successes regardless of their stock prices.

Imagine two years from now, when Bionano should have its next-generation device on the market, and its existing customers will be looking to maintain their systems using new sets of consumables and the occasional maintenance services. It’ll have a steady stream of revenue from sales of new Saphyrs as well as from recurring sales, and its growth might accelerate even further. Skipping out on buying shares today means potentially missing any of the gains it could accrue between now and then — and it might never be cheaper than now.

Likewise, Ginkgo plans to continue its three-year streak of accumulating new business units via acquisition, and it’ll likely continue to gain value over the next few years. If it can eventually attain its goal of becoming a biofoundry capable of designing and scaling the manufacture of custom-made cellular products, there’s no telling how powerful it could become within the biopharma industry — and eventually the market will recognize its progress.

Still, gobbling up wounded growth stocks in biotech specifically is probably best left to the investors who can tolerate a three-course meal’s worth of risk. Ginkgo and Bionano are pioneering quite ambitious projects, and failure is very possible. But if you’re optimistic about the future and want to get a deal, there’s no reason to stop buying growth stocks at the moment, so long as you stick to investing in quality companies.

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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