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3 Growth Stocks Down 79% to 87% You'll Wish You Had Bought on the Dip

Motley Fool - Tue Oct 17, 2023

Investing in growth stocks requires individuals to stomach a lot of volatility. And the smaller the company, the more volatility the share price will likely endure. However smart investors can take advantage of volatility by buying shares of good companies with great long-term prospects when their stock prices decline.

These three stocks have all fallen well below their 2021 all-time highs, and now present tremendous buying opportunities for growth investors. Let's find out a bit more about them.

1. Etsy

Shares of Etsy(NASDAQ: ETSY) trade down around 79% from their all-time high set at the end of 2021. And while it's suffering as pandemic-related gains are easing, the future for this e-commerce company focused on handmade or vintage items and craft supplies looks bright and its shares look undervalued.

Second-quarter revenue growth of 7.5% was fueled almost entirely by its decision to raise seller fees; gross merchandise sales across its properties fell 0.6%.

While some see declining platform sales as a big red flag, it should be noted that gross merchandise sales nearly tripled since 2019. Etsy's sales are consolidating after a couple of years of pandemic-fueled growth, a pattern we've seen across the e-commerce industry.

Moreover, Etsy's decision to raise its seller fees is a strong sign of its competitive advantage. It benefits from a network effect: Buyers are attracted to its marketplaces because they can buy unique, handmade, and customized items. And those 96 million buyers are a big draw for sellers with those kinds of products.

Indeed, despite the seller fee increase, Etsy managed to grow active sellers on the platform nearly 5% sequentially and more than 12% year over year.

Meanwhile, the share price is well below its all-time high, and the stock trades at just 22 times its forward earnings estimate and less than 3 times analysts' sales expectations for 2024. As sales reaccelerate in 2024 and beyond, investors could be getting a massive bargain at this price.

2. Chewy

Chewy(NYSE: CHWY) investors have seen the pet-focused e-commerce site's share price fall nearly 86% from its all-time high at the start of 2021. Chewy also saw its business boom during the pandemic, and it has done a great job holding on to those gains.

At the core of its business is its Autoship subscription service, which accounted for over 75% of sales in the second quarter. The subscription service is extremely sticky, which means greater customer loyalty and more predictable sales.

Chewy is at the forefront of a growing category in e-commerce. Consumers made 36% of pet-related purchases online last year, and that could grow to 45% by 2026, according to Packaged Facts.

Importantly, Chewy appears to be winning significant market share. Its sales grew 14.5% through the first half of 2023; Petco's digital sales grew just 9%, with total sales growing just 3% overall.

At its current share price, Chewy stock trades for just 0.65 times next year's sales estimates. That's substantially below other retailers, especially in the digital-first sector. On top of that, there's no reason to think people will stop spending on their pets.

3. DocuSign

Shares of DocuSign(NASDAQ: DOCU) have fallen 87% from the all-time high reached in mid-2021. Sticking with the pattern, DocuSign was a big beneficiary during the pandemic, as e-signatures became a useful tool for contactless contracts. Over the long term, the convenience of DocuSign's service and push toward paperless transactions should allow it to keep growing. In the near term, it's facing the challenge of holding on to pandemic-era customers.

That said, it still managed a 102% net retention rate in the second quarter. While that's well below the company's historical average, it shows customers are still sticking around and spending more.

And DocuSign is set to become extremely profitable. After years of investing in new products and sales, it's starting to show meaningful leverage. Its GAAP (generally accepted accounting principles) net income swung to $7.4 million in the second quarter, from a $45 million loss in the same period last year. With strong gross margins and a focus on cutting operating expenses, it should produce significant leverage as sales continue to climb.

With the stock trading at less than 3 times forward sales estimates, it looks undervalued considering the company's high profit-margin potential.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy, DocuSign, and Etsy. The Motley Fool recommends the following options: long January 2024 $60 calls on DocuSign. The Motley Fool has a disclosure policy.

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