All three major U.S. financial indexes moved significantly higher in 2023, a welcome turnaround from the steep losses incurred in 2022. Year to date, the Dow Jones Industrial Average is up 12%, the S&P 500 increased 23%, and the Nasdaq Composite jumped 41%.
While the markets as a whole improved and valuations escalated, several individual stocks lagged, creating some buying opportunities in the market. PayPal Holdings (NASDAQ: PYPL) and SolarEdge Technologies (NASDAQ: SEDG) look particularly compelling at their current valuations, and both stocks are widely accessible at less than $100 per share.
Here’s what investors should know about these two growth stocks.
1. PayPal Holdings
Fintech company PayPal grew at a steady pace in the third quarter. Revenue increased 8% year over year to $7.4 billion and non-GAAP net income climbed 14% to $1.4 billion as the company continued to focus on cost control. But CEO Alex Chriss, who took the reins from Dan Schulman in September, sees room to make PayPal leaner, more focused, and more profitable.
The company plans to sell its reverse logistics subsidiary Happy Returns to UPS while leaning into product development and innovation in areas where it has a strong market presence and a substantial competitive advantage — namely, digital wallets for consumers and checkout solutions for merchants. Those assets form the crux of the investment thesis for PayPal.
Specifically, most payment service providers work exclusively with merchants, but PayPal offers financial services to merchants and consumers, meaning it has a deeper understanding of consumer habits. It uses that data to surface shopper insights, improve authorization rates, and prevent fraud for merchants. CFO Gabrielle Rabinovitch says PayPal has the lowest loss rates and best authorization rates in the industry
The upshot of those advantages is that PayPal is the most accepted digital wallet in North America and Europe, and the leader in online payment processing with a 41% market share, according to Statista. In that context, PayPal should grow in lockstep (at a minimum) with retail e-commerce sales, a market forecasted to increase at 7.6% annually through 2030.
Benchmarking PayPal to the broader online retail industry leaves room for upside if the company gains traction in physical retail, something it aims to do with the Venmo credit and debit cards. But even if PayPal merely matches the 7.6% annual growth in retail e-commerce, its current valuation of 2.3 times sales looks cheap, especially when the five-year average is 7.6 times sales. That’s why this growth stock is a no-brainer buy.
2. SolarEdge Technologies
SolarEdge had a dismal third quarter as demand for solar energy products nosedived due to high interest rates. Revenue dropped 13% year over year to $725 million and the company reported a GAAP loss of $61 million, down from a profit of $25 million in the prior year.
Management expects similar results while distributors work through inventory backlog in the coming quarters. However, weak near-term guidance does not change the long-term investment thesis. Renewable energy is inevitable, and SolarEdge is well-positioned to benefit as the solar industry expands in the years ahead.
SolarEdge primarily provides solar inverters, power optimizers, and monitoring software to residential and commercial customers. Inverters change direct current (DC) electricity into usable alternating current (AC) electricity, and power optimizers maximize the energy production per panel by mitigating problems related to partial shading and manufacturing intolerance.
The SolarEdge brand carries weight with its customers (distributors and installers). The company revolutionized the solar industry when it brought the first power optimizer to market about two decades ago, and it has since evolved into the second-largest manufacturer of solar inverters in the world (and the largest outside of China).
Beyond those markets, SolarEdge has branched into the adjacent areas of energy storage (batteries), electric vehicle (EV) chargers, and energy management software. For instance, the company introduced a new storage system and EV management software for commercial customers earlier this year. Those solutions integrate with existing products to extend the functionality of the SolarEdge platform, broadening its addressable market.
On that note, the solar inverter market is forecasted to increase at 4.5% annually through 2031, and the solar battery market is projected to increase at 15.5% annually through 2030, according to Straits Research. Meanwhile, the power optimizer market is forecasted to grow at 13.4% annually, according to Precedence Research.
SolarEdge will probably land somewhere in the middle, meaning the company has a great shot at high-single-digit or even low-double-digit revenue growth through the end of the decade. Indeed, Morningstar analysts expect revenue to grow at 10% annually over the next five years, and Morgan Stanley analysts expect revenue to grow at 9% annually over the next decade.
In that context, its current valuation of 1.6 times sales looks cheap, especially when the five-year average is 5.8 times sales. That’s why this growth stock is a no-brainer buy.
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Trevor Jennewine has positions in PayPal and SolarEdge Technologies. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends SolarEdge Technologies and United Parcel Service and recommends the following options: short December 2023 $67.50 puts on PayPal. The Motley Fool has a disclosure policy.
2 No-Brainer Growth Stocks to Buy Now With $100 and Hold Through 2024 (and Beyond) was originally published by The Motley Fool
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