3 Undervalued Stocks with High Growth Potential

The stage is set for a Fed rate cut if inflation cools down and concerns abate about it reaccelerating. It won’t take much more than a stock market selloff to likely trigger the Fed into action so this might be as good a time as any for bargain hunters to look for some cheap stocks before they ignite.

Let’s look at some potential bargain-basement names with growth potential now, Pinterest, Snap, and Chewy.

Giant Idea-board Pinterest

Pinterest taps into people’s need to seek inspiration. It defines its platform as a “visual discovery engine.”

The company’s popularity peaked a few years ago when it added about 100 million monthly active users (MAUs) in 2020, more than in any other year in the history of Pinterest. As a result, the company’s profits on a non-GAAP basis climbed sharply compared to 2019.

Thereafter in 2021, Pinterest’s global MAUs fell 6% year-over-year. The real slowdown came in 2022, though, when profits declined sharply. But last year, Pinterest’s financials stabilized meaningfully when management took steps to expand the product portfolio.

Pinterest has carried last year’s momentum forward into this year, posting some solid first-quarter growth figures. The company has invested in AI and its overall shoppability. This has led to it seemingly tapping into driving returns for advertisers, basically reflecting improved monetization. In Q1, Pinterest topped half a billion MAUs for the first time.

If we look at the valuation of Pinterest (NYSE:PINS), we can see that its price sits at 28.39x its forward non-GAAP earnings. The perspective changes when growth is considered.

Analysts expect an EPS growth at 41.9% CAGR for 3–5 years, which is why it makes sense that its forward non-GAAP PEG is 0.68x.

32 Wall Street analysts have a consensus upside target of 24.7% in share price to $46.40 per share.

Social Media Platform Snap

Snap’s platform, Snapchat, is most popular with Gen Z. The company reported that over 75% of 13–34-year-olds in over 25 countries use Snapchat. Further highlighting engagement is the statistic that Snapchat has 422 million daily active users and 800 million MAUs.

Snap’s (NYSE:SNAP) financial performance has followed a similar pattern to Pinterest’s, except for one notable difference. Looking at the profitability situation, Snap was making yearly net losses on an adjusted basis in 2020.

Some operating tailwinds led to the company posting an adjusted net income of $774.65 million in 2021. Since then, yearly profits have been declining for two consecutive years. However, the company might “snap” this losing streak if all goes well this year.

And it’s off to a good start in that regard. For the first quarter, the company reported solid gains, with adjusted EBITDA standing at $45.66 million. This is an unprecedented climb since it was only $813 thousand in the prior year’s period.

Snap’s future growth seems to be quite balanced because it is investing in diversification. For example, its premium service, Snapchat+, saw subscribers more than triple year-over-year, surpassing a whopping 9 million subscribers in Q1. The free tier is also supported by small and medium-sized advertising growth.

Snap’s price sits at 64x forward non-GAAP earnings, suggesting it is by no means a bargain when compared to the industry multiple, on average. But that’s the cheapest it has been in five years.

Still, 33 analysts collectively see a consensus 20% upside opportunity to a $15.44 per share price.

Pet-Lover Paradise Chewy

Online retailer Chewy sells pet foods and other pet-related products primarily online and also via mobile app. Chewy’s brand profile has only been going from strength to strength in recent years. According to one survey, the company’s brand awareness is at 87% in the U.S. when it comes to online pet supply stores.

Chewy has a solid value proposition that resonates with a lot of pet owners, with more than 3,500 brands providing access to a variety of pet products.

Recently, it was revealed that the ultimate meme-stock hype-man, Keith Gill, also known popularly as “Roaring Kitty”, took a significant stake in the company, which sparked a wild share price ride. Over the past three months, the stock is up by over 50%, outperforming the broader market by a wide margin.

Chewy (NYSE:CHWY) remains in growth mode. Yearly net sales are still on an uptrend, although quarterly weaknesses have been noticed at times. For instance, in fiscal year 2023 which ended January 28, 2024, Chewy’s top line grew by 10.2% from the prior year to $11.15 billion. The company broke into annual GAAP-based profitability in fiscal year 2022.

Just like Pinterest and Snap, Chewy had a solid start to fiscal year 2024. Although its first-quarter top line grew by a modest 3.1% year-over-year to $2.88 billion despite a pullback in the number of quarterly active customers, GAAP-based net income nearly tripled over the same period to $66.9 million.

Chewy’s price sits at 28.34x its forward non-GAAP earnings. Incorporating growth, its forward non-GAAP PEG sits at only 0.25x. This seems reasonable given that analysts expect EPS growth compounding annually at 115% for the next 3 to 5 years.

Overall, 22 analysts see muted upside of just 4.6% to fair value of $26.54 per share.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.