All about Investing

1 Beaten-Down Growth Stock to Buy, and 1 to Sell

Related categories

Technology stocks are suffering broad declines, but not all of them represent a buying opportunity.

After steadily declining by more than 20% since November 2021, the technology-centric Nasdaq 100 index has shown signs of life by recently bouncing out of bear-market territory.

But many individual tech stocks are still down in excess of 50%, as investors weigh the impact of persistently high inflation, rising interest rates, and global geopolitical tensions. In some cases that's a big opportunity to buy high-growth companies for the long term, but not all discounted stocks are equal, and some should be avoided. 

Here's one investors should consider buying and another they should steer clear from. 

Image source: Getty Images.

The stock to buy: Latch

Securing high-rise commercial and apartment buildings probably doesn't sound like the job of a technology company. But Latch (LTCH -3.08%) is an innovator, using a blend of hardware and software to help building managers handle the flow of guests and deliveries, in the process providing residents with new levels of comfort and convenience. 

Latch gives residents the benefit of digital central controls for the temperature and lighting in their home, plus, they can unlock their doors using a smartphone, smart watch, or door code, thanks to its Smart Access technology. And for building managers, Latch's Intercom allows them to control access to the complex even if they're not present at the time. Additionally, the company's sensors can help with preventative maintenance by detecting water leaks.

Latch is winning contracts for 30% of all new apartments being constructed in the U.S. at the moment, highlighting the growing demand for high-tech access solutions. In fact, as of the end of 2021, Latch had accumulated $360 million in gross bookings, which are expected to convert into revenue once construction of the respective buildings reach completion.

But the company plans to eliminate its gross bookings measure going forward by adding a new metric called 'Spaces' to shift investors' focus to what's happening now rather than what might happen at an unknown point in the future and remove uncertainty around construction timelines.

Latch estimates it will generate between $75 million and $100 million in revenue during 2022, which, at the high end, is more than double the $41 million it delivered in 2021. But thanks to its software products, Latch's projects continue to generate income even after the hardware is installed. At the end of 2021, it had accumulated $71.5 million in annual recurring revenue. 

Latch stock has declined by 74% amid the broader tech sell-off, with a market valuation of just $600 million now. The company is making net losses, which adds an element of risk, but as it builds scale over the long term, it should deliver an extremely healthy business thanks to its dual revenue stream. 

Image source: Getty Images.

The stock to sell: DoorDash

U.S. food delivery leader DoorDash (DASH -1.51%) was a pandemic darling, benefiting from lockdowns and the stay-at-home economy because it gave people a way to enjoy their favorite restaurant foods without leaving the house.  In a glowing indication of its popularity, between 2019 and 2021 DoorDash grew its revenue by 451%, from $885 million to $4.88 billion.

Now that society is almost fully open again, a slowdown in growth is to be expected, but DoorDash's revenue increases are grinding almost to a halt. For example, between the most recent third and fourth quarters of 2021, it experienced growth of just 1.9%. 

The company generated $41.9 billion in gross order volume (GOV) in 2021, which is the value of all the purchases customers made on the DoorDash platform. Its 2022 guidance suggests that figure to be in the range of $48 billion to $50 billion this year, meaning growth could be as low as 14%. While that's still a moderate boost, it's important to note that DoorDash stock trades at a price-to-sales multiple of 7.4, and it's still losing money even with the pandemic tailwinds.

For context, Uber Technologies (UBER -1.99%), which owns Uber Eats, trades at a price-to-sales multiple of just 3.6 -- half that of DoorDash's, despite Uber having a mobility business, a freight business, and triple the annual revenue. The point is that DoorDash stock is quite expensive by comparison. 

That raises the issue of competition. Food delivery technology has low barriers to entry, with few points of difference across platforms. It has triggered a race to the bottom on price and a mammoth marketing expense of $1.6 billion for DoorDash in 2021, chewing up 33% of its revenue. And remember, growth is slowing, so it'll be tough to justify cutting back on advertising going forward. 

DoorDash continues to lose its economic tailwinds, it continues to lose money, and competition likely isn't going away. There's a legitimate risk that its stock falls in line with competitors like Uber on a price-to-sales basis, and that would mean a steep decline from here. In simple terms, investors might be best served by selling.

Leave your comment