Growth stocks have been hit recently. Although this is partially evidenced by high technology Nasdaq Compounddown 6% since February 13, this does not fully capture the slump that many growth stocks have had, since the Nasdaq is not composed entirely of growth stocks. Many growth stocks fell further during this period.
Although sales are painful for shareholders, investors should keep in mind that lower prices lead to greater long-term prospects (assuming nothing has changed in the long-term potential of the underlying business). In fact, this retraction created buying opportunities for some growing stocks. Two that look particularly attractive are the TV broadcast giant Netflix (NASDAQ: NFLX) and cloud-based contact center specialist Five9 (NASDAQ: FIVN). In fact, it would not be surprising to see the shares of these two companies double from those levels in the next five to seven years.
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1. Netflix
Netflix shares have fallen 8.3% since mid-February, creating a good entry point for the shares of the streaming TV company during a crucial time for its business. The company is finally moving from regular cash burn to free cash flow generation (FCF). This is happening as Netflix’s scalable business model is reaching a critical point where subscription revenue is starting to outweigh the costs of the rest of its business, which includes the huge upfront expense that comes with content production. original.
“We believe that we are very close to being sustainable because of the positive FCF,” said Netflix in its letter to shareholders in the fourth quarter. “For the entire year of 2021, we currently forecast that free cash flow will be around the break-even point (compared to our previous expectation of – $ 1 billion for break-even).” In fact, Netflix’s management said it believes it no longer needs to raise external funding. Going further, Netflix is even exploring the possibility of returning money to shareholders through ongoing share buybacks.
In addition, analysts believe there is a lot of strong growth ahead for Netflix. On average, analysts expect Netflix’s earnings per share to grow at an average rate of 44% per year for the next five years, as the company benefits from the operational leverage inherent in its businesses. With such a profit potential, the company’s price / earnings ratio of 84 appears to be a reasonable valuation to pay for these shares.
2. Five9
Five9’s shares fell even more than Netflix recently. The technology stock has dropped more than 10% since mid-February.
Although Five9 is not as established as Netflix, with its 12-month revenue reaching just $ 435 million compared to Netflix’s $ 25 billion, the company appears to be at the beginning of its growth story. In fact, your revenue is growing much faster. Five9’s fourth quarter revenue increased 39% year-over-year, to $ 127.9 million.
“Our performance underscores our market leadership and momentum in our mission to help customers modernize and transform their contact center and reimagine the customer experience,” said Five9 CEO Rowan Trollope in the company’s fourth quarter earnings release. .
Five9 is certainly a riskier action than Netflix, as it lacks the clear leadership position in its industry that Netflix has among streaming competitors. But with a much smaller market capitalization (less than US $ 11 billion), there is a potential for significant appreciation in the long run if Five9 can continue to grow rapidly and capitalize on the opportunity to digitize and modernize contact centers.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even our own – helps all of us to think critically about investing and making decisions that help us become smarter, happier and wealthier.