The bear market of 2022 has hit growth stocks especially hard. Major indexes like the S&P 500 (currently down about 18% from all-time highs at the end of December 2021) mask severe pain. Some technology stocks are down 50% or more.
Some of these companies may never recover, but others are high-end outfits that have been thrown away for no real good reason. Buy now can pave the way for incredible investment returns once this bear market gives way to the next bull. Three Fool.com contributors think: Amazon (AMZN -1.77%), AMD (AMD) -3.28%)and Sea Limited (SE -7.28%) are stocks that could rise once the clouds begin to clear. This is why.
This long-term winner now looks super cheap
Anders Bylund (Amazon): E-commerce and cloud computing giant Amazon rocketed in the early days of the COVID-19 pandemic, but the stock hit a wall in 2022. Amazon stocks are trading more than 30% below their 52-week high, about double the correction seen in the S&P 500 market index.
The brutal discount makes sense at first glance. The April first quarter report fell short of Wall Street’s expectations. Amazon’s investment in electric car manufacturer Rivian Automotive has been costly and disappointing so far. In addition, the company’s second-quarter outlook pointed to the slowest year-over-year revenue growth in Amazon’s history. So I understand if some investors are uncomfortable with Amazon’s $1.3 trillion market cap.
However, the company is making efforts to rejuvenate its lagging growth trajectory, and some of the slowdown was artificial in the first place.
The Prime Day sales event fell in the second quarter of 2021, but has been moved to the third quarter this year, making the year-over-year comparison for the second quarter significantly more difficult. On the other hand, the third quarter will benefit from the same calendar shift and Amazon’s next set of target targets should look quite optimistic.
In addition, the calendar surpasses the growing availability of COVID-19 vaccines by mid-2021, inspiring many shoppers to visit local stores instead of their favorite e-commerce portals. That effect was never under Amazon’s control.
At the same time, the company continues to deliver robust business results in virtually any market environment, despite its declining share price. As a result, Amazon stock is trading at one of the lowest enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) ratios in the past 20 years. The same goes for Amazon’s price-to-earnings ratio.
This company is built to last. Amazon’s growth story should resume in the second half of 2022 as year-on-year comparisons become less difficult. As the stock market recovers from current inflationary pressures, Amazon stocks appear resilient to a strong recovery. And even if the rebound slows down, Amazon is the kind of stock you want to own for the long haul anyway. The company’s diverse exposure to cloud computing, digital media and logistics services can keep the good times going, even as the e-commerce business negotiates a few speed bumps.
Long story short, I believe Amazon stocks belong in almost every long-term investor portfolio, and the current low stock price should be seen as a buying opportunity.
A transformational merger that the market does not take into account
Nicholas Rossolillo (AMD): Former chip design underdog AMD has come a long way in the past decade (stocks are up nearly 2,000% in the last 10 years), and the next decade is looking better than ever before. Processors for data centers and other high-performance computing applications from the company are in high demand (EPYC chip sales grew 88% year-over-year in the first quarter of 2022). And when it comes to consumer PCs, AMD is no longer too-run. It designs some good stuff and has plenty of room to keep “chipping” at Intellead the market share.
In a further gamble on its industry-leading silicon portfolio, AMD completed its merger with Xilinx early this year — one of the largest mergers and acquisitions ever in the technology sector. Xilinx will help increase AMD’s exposure to the fastest-growing enterprise computing end markets, and help AMD break new ground in arenas such as automotive, aerospace and defense.
However, the best thing about Xilinx is that it will increase AMD’s profit margins. CEO Lisa Su said full year 2022 growth (including the addition of Xilinx) is expected to increase by 60% compared to 2021. Add to that even larger profit margins, and that means earnings per share in an even will grow at a faster rate. However, as many investors have become wary of a major slowdown in economic growth (or even a recession), semiconductor stocks have been punished. AMD is down 46% from its all-time high.
Shares are currently trading at 33 times lagging 12-month earnings, but trading at 20 times analysts’ estimates for full-year 2022 earnings — a valuation that appears to be discounting the possibility that AMD’s operating results may well exceed its expected 60% revenue. to grow . That makes AMD a buy in my book. Once some of the bearish outlook that is affecting most chip stocks this year begins to fade, AMD could take another flight.
Sea Limited should emerge from this downturn on a stronger footing
Billy Duberstein (Sea Limited): Given its leading franchises in mobile games, e-commerce and fintech, Sea Limited has the ability to chase much of the gross domestic product of Southeast Asia and Latin America. Of course, these three diversified segments are all consumer-oriented businesses, so they should pick up the economy in the future to really benefit from it. That is why Sea Limited would be a beneficiary once we get past the current economic slowdown.
Make no mistake, Sea’s second quarter and 2022 could suffer from some headwinds, and I would be cautious heading into the upcoming Q2 earnings report. The post-pandemic gaming hangover has already manifested itself in the subdued 2022 gaming revenue forecast, while rising food and oil prices could cause consumers in the region to pull back on discretionary items. That could also slow Sea’s hyper-growth Shopee ecommerce platform compared to last year’s robust growth rates. Meanwhile, a recession could harm SeaMoney, the fast-growing fintech platform that Sea is building, and nevertheless be subject to underwriting risks.
Still, Sea should be able to get through this period. The company was smart enough to raise $6 billion last September, through the sale of low-interest convertible bonds, as well as share sales when the stock price was $318, more than quadrupling its current price. That bolstered Sea’s cash position, giving it the ability to expand without worrying about raising money for years to come. That’s a great luxury to have, and it should allow it to expand its e-commerce and fintech leadership in both Southeast Asia and Brazil against tighter competitors.
While Sea lost $580 million in profits in the quarter alone, management has pledged to achieve positive pre-headquarter adjusted EBITDA in its Southeast Asian e-commerce business by the end of this year, and to cash flow to break even in its SeaMoney fintech segment next year. Management also wisely pulled out of highly competitive, money-losing markets like India and France last year, as those markets had a longer time to turn profitable. All these indications show that management “gets it” and after years of hypergrowth is turning the right way to profitability.
The current focus on profit is appropriate and should give Sea Limited a firmer foundation as we get through this difficult economic period. Once the capital markets stabilize and we either weather a recession or the fear of it, Sea’s growth should pick up again, probably from an even more competitive position.
With its tentacles in so many categories and geographies in Asia and Latin America, Sea’s growth potential seems limitless as long as the consumer economy in those regions remains strong. Therefore, I am cautious in the short term, but bullish in the long term for this stock, once the new bull market kicks in.