Over the long term, Wall Street is a wealth-building machine. Compared to other asset classes, such as bonds, housing, and commodities (e.g., oil and gold), nothing comes close to the annual returns that stocks have delivered over the past century.
But this does not mean that stock prices rise in a straight line.
The first three trading sessions of August were marked by the growth stock-driven Nasdaq Composite about 1,400 points, or 8% of its value, officially putting it in correction territory. While steep declines can be nerve-wracking (especially for newer investors), they have historically been a favorable time for long-term investors to enter.
While we can never predict with any precision when downturns will start, how long they will last, or where the bottom will be, we do know that the major indices increase in value over time. Spotting price disruptions in high-quality companies during market corrections is often a winning strategy.
Below are two historically cheap growth stocks that investors can pile into and no longer ignore.
Time to strike: Baidu
The first astonishingly cheap growth stock that investors can now confidently add to their portfolios is the China-based internet search giant Baidu (NASDAQ: BIDU).
Admittedly, Chinese stocks have their own unique concerns given the regulatory issues that can arise when dealing with the Chinese government. This combination of regulatory oversight and the country’s economy not quite firing on all cylinders following the end of COVID lockdowns has weighed heavily on Baidu and other Chinese brand-name stocks.
Fortunately, there are a number of reasons to believe that Baidu has hit rock bottom and is too cheap to ignore any longer.
For starters, the company’s internet search engine accounts for more than 50% of domestic searches and has for more than a decade. As the clear go-to for search, Baidu has had no trouble luring advertisers and wielding considerable ad pricing power. There’s no reason to believe this segment won’t remain a major cash cow for years to come.
But what’s far more exciting is where it’s investing that cash flow. For example, it’s one of China’s leading cloud infrastructure service providers. Enterprise cloud spending is still in its infancy in China, and companies have only just begun to ramp up their spending. With cloud service margins easily outpacing advertising margins, we should see Baidu’s operating cash flow grow significantly over time.
Baidu is also the company behind Apollo Go, the world’s leading autonomous ride-hailing service. Since its inception, Apollo Go has completed over 6 million rides as of April 19, demonstrating the value of the company’s investment in artificial intelligence (AI) in action.
What’s more, Baidu is sitting on a veritable treasure trove of cash. It ended the quarter ended March with about $26 billion in cash, cash equivalents and marketable securities, which compares quite favorably with its current market cap of $30 billion. If the U.S., Chinese or global economies were to enter a recession, Baidu would be better positioned than most to weather the storm.
With earnings less than 8 times expected earnings over the past year (without adjusting for a net cash position of $13.7 billion), Baidu stock is dirt cheap. Now is the time to strike.
Time to strike: Fiverr International
A second high-growth stock that investors can jump on with confidence is the online services marketplace Fiverr International (NYSE: FVRR).
While AI is expected to fuel the growth of Baidu’s non-online marketing segment in the coming years, there is genuine concern on Wall Street that AI could put a serious dent in Fiverr’s online marketplace for freelancers. In other words, AI could “steal” jobs that freelancers previously handled, limiting the need for online service marketplaces.
The good news for Fiverr is that it has been able to embrace AI with open arms and has actually used the technology to modestly increase its sales. It seems that concerns about AI hurting the freelance space have been largely overblown.
Looking beyond these headwinds, we see four well-defined catalysts that could help Fiverr move higher.
For starters, the composition of the workforce has changed permanently after the pandemic. More people are working remotely than before the pandemic, which is perfect for Fiverr’s platform that focuses on freelancers.
Secondly, the platform’s differentiation is responsible for a steady increase in spend per buyer. While most competing online service marketplaces allow freelancers to price their tasks at an hourly rate, Fiverr freelancers list their tasks as completed tasks. This cost transparency is clearly resonating with buyers on the platform.
The third selling point for Fiverr is its take rate: the percentage of every transaction completed on the platform, including fees, that it keeps. While most competitors have take rates in the mid-teens, Fiverr generated a take rate of 33% in the quarter ending in June.
It takes a larger percentage of each deal negotiated on its platform, but still sees its buyers spend more per transaction. This is a recipe that should lead to superior operating margin over time.
Finally, it has used inorganic means to enter new verticals. The acquisition of AutoDS, a provider of subscription-based end-to-end solutions for dropshippers, is an example of this revenue diversification in action. It’s a new means of generating sales, but it still complements Fiverr’s ecommerce ecosystem.
Fiverr is valued at less than 10 times year-to-date adjusted earnings, which is near its lowest level since its IPO in June 2019. With continued double-digit earnings growth a real possibility, now seems like the perfect time for opportunistic investors to pounce.
Should You Invest $1,000 in Baidu Now?
Before you buy shares in Baidu, you should consider the following:
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Sean Williams has positions in Baidu and Fiverr International. The Motley Fool has positions in and recommends Baidu and Fiverr International. The Motley Fool has a disclosure policy.
Time to Strike: 2 Historically Cheap Growth Stocks You Can No Longer Ignore was originally published by The Motley Fool
