Time to Crash: 2 Historically Cheap Growth Stocks That Can’t Be Ignored Anymore

In the long run, Wall Street is a wealth-generating machine. Compared to other asset classes such as bonds, housing and commodities (eg oil and gold), nothing comes close to the annualized returns that stocks have delivered over the past century.

But that doesn’t mean stocks go up in a straight line.

The first three trading sessions in August featured rising stocks Nasdaq Composite losing about 1,400 points, or 8% of its value, which officially put it in correction territory. While steep declines can be unsettling (especially for newer investors), they have historically been an opportune time for long-term investors.

Image source: Getty Images.

While we will never be able to predict precisely when recessions 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 dislocations in high-quality businesses during market corrections is often a winning strategy.

What follows are two historically cheap growth stocks that investors can pounce on and simply can’t be ignored anymore.

It’s time to pounce: Baidu

The first stunningly cheap growth stock that investors can confidently add to their portfolios right now is China’s internet search giant. Baidu (BIDU -2.56%).

Of course, Chinese stocks have their own unique concerns given the regulatory issues that can arise when dealing with the Chinese government. That combination of regulatory oversight and that nation’s economy not firing on all cylinders after the end of the COVID lockdowns hurt Baidu and other big-name Chinese stocks.

Fortunately, there are a number of reasons to believe that Baidu is near rock bottom and is simply too cheap to ignore.

For starters, the company’s Internet search engine accounted for more than 50 percent of domestic search for more than a decade. As a clear search solution, Baidu has had no trouble luring advertisers and wields substantial ad pricing power. There is no reason to believe that this segment will not remain a key cash cow for years to come.

But what is much more interesting is to see where it invests this cash flow. For example, it is one of the leading cloud infrastructure service providers in China. Enterprise cloud spending is in its relative infancy in China, and companies are still in the early stages of spending growth. Given that cloud service margins easily exceed 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 transportation service. As of April 19, Apollo Go has surpassed 6 million rides since inception, demonstrating the value of the company’s investments in artificial intelligence (AI) in action.

Moreover, Baidu is sitting on a veritable treasure chest of cash. It ended the quarter ended in March with about $26 billion in cash, cash equivalents and marketable securities, which compares quite favorably to its current market capitalization of $30 billion. If the US, Chinese or global economy were to enter a recession, Baidu would be in better shape than most companies to weather the storm.

At less than 8 times annualized earnings (not adjusting for its $13.7 billion net cash position), Baidu’s stock is very cheap — and the time to pounce is right now.

Image source: Getty Images.

Time to Pounce: Fiverr International

A second high-growth stock that investors can jump into with confidence is the online services market Fiverr International (FVRR -4.12%).

While AI is expected to propel growth in Baidu’s non-online marketing segment for years to come, there was real concern on Wall Street that AI would seriously affect Fiverr’s online marketplace for freelancers. In other words, AI could “steal” jobs that freelancers previously handled, thus 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 would appear that concerns about AI affecting the freelancer space are largely overblown.

Moving past this headwind, we find four well-defined catalysts that can lift Fiverr.

For starters, the composition of the workforce has changed permanently following the pandemic. More people are working remotely than before the pandemic, which is perfect for Fiverr’s freelance platform.

Second, platform differentiation is responsible for a steady increase in spend per shopper. While most competing online service marketplaces allow freelancers to price their tasks at an hourly rate, Fiverr freelancers list their jobs as completed tasks. This cost transparency resonates very clearly with buyers on the platform.

Fiverr’s third selling point is its take rate: the percentage of each transaction completed on its platform, including fees, that it gets to keep. With most of its competitors having take rates in the mid-teens, Fiverr generated a 33% take rate in the quarter ending in June.

It takes a higher percentage of each transaction 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 used inorganic means to move into new verticals. The acquisition of AutoDS, a provider of subscription-based end-to-end solutions for drop-shippers, is an example of this revenue diversification in action. It’s a new means of generating sales, but it still complements Fiverr’s e-commerce ecosystem.

Fiverr is valued at less than 10 times adjusted earnings per year, which is near an all-time low since going public in June 2019. With sustained double-digit earnings growth a real possibility, now seems like the time perfect for opportunistic investors to pounce.