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Down Over 70%, 3 Growth Stocks With Fortress Balance Sheets to Weather a Bear-Market Storm

Motley Fool - Sat Apr 30, 2022

Bear markets can actually present great opportunities to buy growth stocks -- provided you pick the right ones. Down roughly 22% from the peak it hit last year, the Nasdaq Composite index is already in bear territory, and investors may want to consider which beaten-down growth names look sturdy for the long term and are worth pouncing on.

With that in mind, a panel of Motley Fool contributors has identified a trio of growth stocks that have formidable balance sheets and trade down more than 70% from their highs. Read on to see why they think that Shopify(NYSE: SHOP), Pinterest(NYSE: PINS), and Zoom Video Communications(NASDAQ: ZM) look like smart buys.

A bear's shadow on top of a stock sheet.

Image source: Getty Images.

An e-commerce play that has fallen from grace

Daniel Foelber (Shopify): The Shopify stock sell-off has been swift and brutal. Like other growth stocks, Shopify's valuation was largely dependent on a booming economy with low interest rates. In today's climate of high inflation and the Federal Reserve's decision to raise interest rates to offset inflation, business growth is likely to slow. Rising interest rates have little direct impact on Shopify because it doesn't depend on debt. But rising rates do affect Shopify's customers, many of which rely on financing to grow.

Down 75% from an all-time high set just around six months ago, there is reason to believe that Shopify stock has a lot of upside from here. As mentioned, the company doesn't depend on debt to run its business and actually has a net cash position.

SHOP Debt To Capital (Quarterly) Chart

SHOP Debt To Capital (Quarterly) data by YCharts

Shopify's debt-to-capital ratio of 7.6% indicates that debt is not a core part of its capital structure. Shopify is also free cash flow positive, a sign that its business is operating efficiently. Shopify may not grow at the parabolic levels we saw in 2020. But it's still an industry leader in e-commerce. Investors who feel like they missed out on Shopify can now buy the stock for a far lower price. However, it's important to remember that the short-term outlook even for great companies like Shopify is choppy and could get even more volatile from here.

A kinder, gentler kind of social media

James Brumley(Pinterest): I know $2.5 billion isn't a lot of money for some companies. But when you're only spending about $2.2 billion per year on operating expenses and you're already profitable anyway, that figure can keep you afloat even in the event of a rough year that pushes you back into the red.

The company in question: Pinterest. It's one of the smaller social media platforms, and arguably pushes the boundaries of what qualifies as a social media name. But as consumers grow wearier of the bickering and toxicity of the once-favored social networking sites, it's the more topic-focused and personalized platforms that are going to benefit. Pinterest is one of these names.

We're certainly seeing evidence of the growing interest too. Last year's top line of $2.6 billion was more than a 50% increase of 2020's revenue, pushing the company out of the red and into the black. Boosting that growth is a more concerted effort to monetize all the traffic Pinterest generates since launching in 2010. For instance, it turned up the heat in a big way last year on allowing content creators to monetize the traffic their Pinterest pages prompted.

The stock's down nearly 80% from record highs reached in February of last year, with most of that loss likely reflecting user losses suffered in the meantime. Now more than a year into its attrition and revitalization effort, though, I suspect the user comps are going to start looking better from here.

Don't count this communications leader out

Keith Noonan (Zoom Video Communications): At the peak of social distancing and shelter-in-place conditions, Zoom was on top of the world. The company's video-conferencing services became central to business operations and everyday communications, and investors bid the stock up to dizzying levels.

With pandemic conditions now easing in most countries and macroeconomic risk factors weighing on the market, Zoom stock has tumbled precipitously from its high. The company's share price is now down approximately 83% from the peak that it hit in October 2020, and it would be a mistake to pass up on the stock at current levels.

While the pandemic growth catalyst has receded substantially, video-conferencing services will continue to facilitate work-from-home and hybrid-work setups. Zoom is also branching into new service categories that will create new growth opportunities and strengthen the overall business, and it's got the resources to make some big moves.

The company ended its last reported quarter with a cash position of roughly $1.06 billion against zero debt, and it also held marketable securities worth approximately $4.36 billion. That gives the company fantastic financial positioning to fund its own internal growth initiatives and carry out acquisitions capable of opening up new growth avenues. If bear market conditions push business valuations lower, Zoom is in good shape to identify and act on worthwhile acquisition opportunities.

With a market capitalization of roughly $29 billion and the company valued at approximately 6.4 times this year's expected sales and 27 times this year's expected earnings, Zoom stock looks attractively valued. The video-conferencing leader has a great balance sheet, and its growth story is likely just getting started despite what the current narrative surrounding the stock might suggest.

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Daniel Foelber has positions in Shopify and has the following options: long January 2024 $145 calls on Zoom Video Communications, long January 2024 $45 calls on Pinterest, long September 2022 $600 calls on Shopify, short January 2024 $150 calls on Zoom Video Communications, short January 2024 $47.50 calls on Pinterest, and short January 2024 $600 calls on Shopify. James Brumley has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pinterest, Shopify, and Zoom Video Communications. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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