Growth stocks certainly aren’t in vogue this year. 2022 started with a tech sell-off, prompted by a surge in US Treasury yields. Growth and tech stocks have continued to fall amid higher inflation and interest rates.
Growth and technology stocks can appear much more expensive as they’re valued on future growth expectations. I actually had no exposure to such stocks at the beginning of the year. Generally I thought they’d become far too expensive.
Tesla is the perfect example of this. At it peak share price, it had a price-to-earnings (P/E) ratio of around 230. That means it would have taken 230 years for the company’s profits to cover the value of its shares.
But as prices fall, growth stocks are becoming more attractive to me. Here are my top picks to buy before June.
NIO (NYSE: NIO) fell 8.5% yesterday, but other growth stocks dropped too. The Chinese EV manufacturer is on an impressive growth curve, with revenue increasing at a similar rate to market leader Tesla. The Shanghai-based company has a market cap of just $22bn, a fraction of Tesla’s $650bn.
While NIO doesn’t expect to become profitable until 2024, other metrics, such as price-to-sales (P/S), highlight why I think NIO is great value compared to its peers. The stock has a P/S ratio of around 4, versus 13 at Tesla. Lucid and Rivian have P/S multiples above 100.
Lockdowns in China might hurt growth this year. That’s definitely one concern. However, I like the brand, its EV offering, and its unique battery swapping technology.
Yalla (NYSE:YALA) isn’t a typical growth stock as its already trading with fairly low multiples. It has a P/E ratio of just 7.7 and a P/S ratio of 1.8. The Middle East/North Africa-focused social media and gaming platform saw revenues rise rapidly during the pandemic, but growth has slowed. The stock plummeted in line with other growth stocks, but also as investors saw growth slowing.
Q1 2022 was its most successful quarter to date as revenue rose year-on-year from $67.6m to $72.3m. Average monthly active users (MAUs) reached 29.2m during the period — a 55.3% increase from Q1 of 2020.
Yalla has big plans for expansion and the cash to make it happen. For example, it has recently launched the region’s first-ever social metaverse app, WAHA.
The slowing growth curve isn’t great to see, but I think this stock looks like great value. Investors will be keen to see whether growth can be sustained beyond the core pandemic years.
Darktrace (LSE: DARK) stock has bounced up and down since it was listed last year. The cyber-defence firm saw its share price fall last week as one of its executives was named in a legal row concerning Autonomy’s 2011 sale to Hewlett Packard.
However, at around 330p, I think Darktrace looks like great value. Demand for cyber-security is on the rise amid increased global competition following Russia’s invasion of Ukraine. Revenue is rising and at today’s price, Darktrace has a P/S ratio of around 8. This is considerably cheaper than its peers, such as CrowdStrike at 23.
There’s plenty of concern about the competitiveness of the sector. But I see Darktrace continuing to grow amid increased demand for its services. It’s also trading near its all-time low.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
James Fox owns shares in NIO and Darktrace. The Motley Fool UK has recommended CrowdStrike Holdings, Inc. and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.