Will Growth Stocks Recover?

After the initial success of the Covid-19 vaccine roll-outs earlier this year, market activity witnessed a rotation out of certain big name growth companies and into more robust, value-oriented stocks enjoying a recovery-fueled boost instead.

While not all high-growth stocks have been suffering—most of the big FAANG companies, such as Apple (AAPL), Microsoft (MSFT), and Meta Platforms (FB) are all up double-digit percentage points for the year—many other well-known businesses took a hit in 2021.

Twitter (TWTR), whose year-on-year revenues have been growing nicely at nearly 40%, actually saw its share price plummet 13% over the course of the last twelve months.

In this article we’ll look the three most important questions facing investors.
  • What brought about this retrace?
  • Is there a recovery on the cards?
  • And, crucially, which stocks are likely to be the first to bounce back?

Why Did Growth Stocks Get Crushed?

As customer habits and behaviors altered during the course of the pandemic, it was only natural that companies which catered to these changes would begin to thrive.
Businesses such as Peloton (PTON), whose home workout equipment saw increased user demand throughout the health crisis, was one such beneficiary of these evolving consumer trends.
Other firms that offered similar lockdown-related solutions in the digital settlements and e-commerce space also flourished, as retail and entertainment activity shifted online.

However, the “economic shutdown” payday wasn’t to last. The prevalence of such maladies as “Zoom Fatigue” became a common reality, a kind of condition arising out of long, draining video conference sessions, but also a wider symptom of unease and discontent stemming from the ongoing lock-downs and social distancing measures.
The collective sense of urgency at the start of the virus outbreak which helped individuals steel themselves for hardships and sacrifice was gone, and people were just desperate to get back to normal. Those growth stocks that rode the pandemic tailwinds were now stuck in the doldrums.
In addition to the Covid-19 recovery dampening enthusiasm for pandemic stocks, there was also the ongoing semiconductor shortage which hit hi-tech growth stocks hard, as well as an enduring, and no less damaging, supply chain crisis to contend with.
Though not all growth companies were equally affected, there were plenty of high-profile names that came unstuck. Businesses in the non-essential retail sector have suffered from supply chain issues especially, with Lululemon Athletica (LULU) shares, for instance, slightly down over the past twelve months.

Consumer spending has also declined when it comes to car manufacturers and other durables reliant on semiconductors as part of their production process, with a drop of 26.2% during Q3, comparing particularly unfavorably with Q2, which actually saw an increase of 13.0%.
Conversely, with demand for microprocessors skyrocketing in response to a declining supply, chip manufacturers have seen their own stock price continue to rise.
The VanEck Vectors Semiconductor ETF, a good barometer of the semiconductor industry as a whole, has appreciated 35% during 2021, with investors desperate to get exposure to this growing segment.

Are Growth Stocks Still In A Bear Market?

As the economy began to slow down at the end of the third quarter 2021, the preference for value stocks also began to shift. Growth companies, seen as a defensive measure when the market is weak, are now back in vogue, with cyclical sectors such as energy and raw materials well out of favor. 
Indeed, the Nasdaq Composite—an index heavy with growth-oriented companies—is up 7% from 6 months ago, and would have been even higher were it not for a few large tech companies, like Apple (AAPL) and Nvidia (NVDA), slipping recently, bringing many of the big market averages down with them.
But the story is still one of rising optimism for the growth sector now. 
Source: Unsplash

Which Growth Stocks Will Rebound First?

There’s a smorgasbord of companies that could make a comeback from their current woes, and, if there’s a general market reversal in the high-growth sector, just as a high tide raises all boats, many firms could be winners in the coming months.
But if you’re looking to maximize your return on investment to the full, it might be prudent to pick stocks which have fared particularly badly of late, and which offer the largest potential for rebound profit.
If that’s the case, you might be interested in a company like Block, the brand formally known as Square. This Jack Dorsey-led financial services business has exploded in value since the beginning of the pandemic, growing its share price from just $40 in March 2020, to highs of above $280 earlier this year. But investors have turned against the firm since then, and the stock now trades at a 40% discount at around $170 per share today.
What makes Block stand out from the crowd is its high-growth product mix, and the fact that the company is not yet profitable. And with a recent revenue and earnings miss, the stock is even cheaper than it should be, making it potentially an ideal time to buy, as investors took to heart the news that its Cash App and crypto-related segments had poorly underachieved.

But don’t be fooled — Square ticks plenty of boxes that should make this a high-performing growth stock for the future.
To begin with, SQ expects its year-on-year gross profit growth to be strong across both its Cash App and Seller ecosystems on a two-year compound annual growth rate (CAGR) basis, on top of its already healthy 43% year-on-year gross profits of $1.13 billion in the third quarter of 2021.
Furthermore, for a growth company like Block, its forward price-to-sales ratio of 4.37 is strikingly low. For comparison, PayPal (PYPL), a similar but far more mature business which operates in the same sector, has a forward sales multiple almost double that at 8.63.
Most promising, however, is the market opportunity that Square potentially enjoys. Research suggests that the global FinTech space was valued at $7.3 trillion in 2020, and could grow at a possible CAGR of 26.87% until 2026.
SQ is positioned to a leader in the digital payments industry, and should expect to take a sizeable chunk of this revenue in the coming years.

How High Could Growth Stocks Go?

Despite some hesitancy in the general market over the outbreak of the new Omicron variant of Covid-19, the tech sector had a good month in November, with the the S&P technology subindex up 2.1% overall.
As attention turns to growth stocks, investors should be on the look-out for cheaply valued companies that have performed somewhat worse than their peers in the recent downturn.
And if the growth rally continues apace, you can expect 2022 to be a year of big profits and high capital appreciation.

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