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Stoneco Ltd Cl A(STNE-Q)
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2 Growth Stocks Down 89% and 92% You'll Regret Not Buying on the Dip

Motley Fool - Fri Oct 13, 2023

While the S&P 500 index has climbed roughly 13.5% this year, there are still some intriguing stocks out there that trade at massive discounts. Investors have to be selective about which of these beaten-down companies they put their money behind, but backing the right ones could be a path to market-crushing gains.

If you're on the hunt for the best of the market's deeply discounted growth stocks, read on to see why two Fool.com contributors think that these underappreciated companies could deliver massive wins.

Don't underestimate this fast-growing business

Keith Noonan: StoneCo(NASDAQ: STNE) is a Brazilian fintech company that went public in 2018. At the start of this decade, the company's core payment-processing services business produced strong results, and its lending services for small and medium-sized business had encouraging momentum.

Along with a surge in bullish momentum for growth stocks, impressive business performance pushed StoneCo's valuation above $94 per share in February 2021. It would be an understatement to say that the valuation picture has changed a lot since then.

In conjunction with some shortcomings in the national registry system that StoneCo had used to assess creditworthiness, challenges brought on by the pandemic wrecked its lending business. Due to a surge in business failures, the fintech specialist was left with a lot of bad loans in its credit portfolio.

The company has now written off or sold those distressed loans at very low prices, but its share price is down approximately 89% from its high.

While investing in the stock means embracing some risk stemming from macroeconomic volatility in Brazil, StoneCo has actually been posting great business performance. Driven primarily by strong results for payment-processing offerings, StoneCo's revenue climbed 28% year over year to hit 2.95 Brazilian reals -- or roughly $584 million. Thanks to continued sales growth, cost-saving initiatives, and general margin improvements, the company's non-GAAP (adjusted) net income jumped 477% to 322 million reals -- approximately $64 million.

Growing profits at a rapid clip and trading at just 13.5 times this year's expected earnings, StoneCo stock could deliver explosive returns for patient shareholders.

Fiverr makes it easier to get the job done

Parkev Tatevosian:Fiverr International's (NYSE: FVRR) stock is down 92% off its highs, and investors might regret missing out if they don't buy it at a lower price. The gig economy platform has done a solid job growing revenue, runs an asset-lite business model, and the sell-off has the stock trading at a bargain valuation.

Indeed, Fiverr expanded sales from $52 million in 2017 to $337 million in 2022. This summer has been the summer of labor strikes in the U.S. Moreover, employers have found getting employees back to the office difficult. Rising wage demands, a shortage of workers, and flexible work requirements have made hiring full-time employees a less attractive proposition for businesses. Fiverr is one platform that can step in and capitalize on the trend.

FVRR PE Ratio (Forward 1y) Chart

FVRR PE Ratio (Forward 1y) data by YCharts

Given that Fiverr's only significant capital investment is in its platform that brings together workers and businesses, the company's need for cash to grow should be relatively minimal. Instead, the key to Fiverr's growth will be creating and finding solutions to the needs of both buyers and providers of freelance services.

If Fiverr can make it easier for freelancers to sign up and more accessible for businesses to see what they are looking for, then the company can expand its reach. Fortunately, investors can buy this growth stock with an asset-lite business model at a bargain valuation, trading at a forward price-to-earnings ratio of less than 12. Given the attractive price, this bargain might not be around for long.

These stocks could bounce back and deliver big wins

While StoneCo and Fiverr's respective stocks have struggled over the last couple years, there's a lot to like about these businesses. Both companies are facilitating and benefiting from long-term trends that are still just starting to unfold, and each one is valued at a level that leaves room for shareholders to score huge returns. With their shares currently trading at basement-level prices, investors might regret it if they pass on StoneCo and Fiverr.

10 stocks we like better than StoneCo
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Keith Noonan has positions in Fiverr International and StoneCo. Parkev Tatevosian, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Fiverr International and StoneCo. The Motley Fool has a disclosure policy.

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