Many US growth stocks have struggled over the past few months. This has been due to rising inflation, and in some cases, poor financial results. Several of these companies also saw large boosts during the pandemic, and many investors have now started to bank profits. But the potential of many these stocks remains, and here are two that I believe are now oversold.
A telehealth provider
Teladoc (NYSE: TDOC) has suffered a tragic decline since February this year, with the shares falling over 60%. Over the past year, it has also seen a decline of around 45%. This is despite the company continuing to grow revenues, even despite fears that telehealth will become less relevant after Covid.
In fact, in the company’s Q3 trading update, it reported revenue growth of 81% year-on-year, hitting $522m. This means that the company expects full-year revenues of over $2bn, around twice as much as last year. The company also recently launched Primary360, which allows clients to pick their healthcare provider. I feel that this will help the company cement its position as a market leader in the telehealth sector. The consultancy firm McKinsey & Company also estimates that the US virtual care market could reach $250bn. With a market cap of just $17bn, and as a current leader in this market, Teladoc has plenty more room to grow.
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But there are risks for the growth stock, which is the main reason why the shares have fallen. For example, the transition to virtual healthcare is certainly not guaranteed, and many customers may revert to face-to-face healthcare post-Covid. Further, the company is continually posting losses, and in Q3, the net loss totalled $84.3m. Although this was primarily due to stock-based compensation, which should cease at some point, it is still a slight worry that the company is unable to reach profitability despite the surge of demand caused by Covid. Even so, I think the company’s potential outweighs these risks, and I may add more shares to my portfolio.
A Chinese growth stock
Alibaba (NYSE: BABA) has struggled over the past year, falling 50%. This has mainly due to regulatory crackdowns from the Chinese government, which have threatened to depress profits for the e-commerce company. This worsened recently, as Alibaba was fined once again on Saturday for anti-competitive behaviour.
The most recent Q2 results were also disappointing, and this has seen the Alibaba share price fall to post-pandemic lows. In fact, although revenue managed to grow 29% year-on-year to over $31bn, this was below analysts’ estimations and far slower growth than last year. Net income also only managed to reach $524m, an 87% decrease from last year. Although this was mainly due to changes in the market price of the company’s equity investments, alongside increased investment from the company, it is still a worry.
But with Alibaba shares priced at just $136, I feel that it is oversold. Indeed, despite the headwinds it faces, it still expects FY2022 revenue growth of over 20%. This is far slower than last year, but still a positive sign that it is managing to grow. Slower growth is also factored into the share price. Indeed, it has a forward price-to-sales ratio of around three. This is very low for a growth stock, and despite the company’s slowing growth, still demonstrates undervaluation. Therefore, I may buy some Alibaba shares.
