2 Beaten-Down Growth Stocks Wall Street Thinks Could Soar
The recent sell-off in technology stocks has been brutal, but some analysts have spotted bargains among the red ink.
Professional investors on Wall Street don't always get things right, but in times of stock market turbulence, it can be beneficial to lean on their expertise. Combining analysts' forecasts with a long-term investment horizon is a great recipe for positive returns, especially when stocks are trading at steep discounts to their all-time highs.
Cloud computing up-and-comer DigitalOcean (DOCN -3.42%) and used-car sales innovator Carvana (CVNA -13.03%) are two candidates that fit the bill. Amid the tech sell-off, they've suffered stock price declines of 62% and 72% from their highs, respectively, and Wall Street thinks they could soar. Here's why these two beaten-down stocks have Wall Street's interest.
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1. The case for DigitalOcean
The cloud computing industry is crowded with tech giants like Alphabet, Microsoft, and Amazon, but DigitalOcean has found an edge in the market serving small- and mid-sized companies.
Whether you're building apps, games, or software, scale often plays a big role in how affordable cloud services are. The larger an organization grows, the less it pays per unit of bandwidth and storage, for example, which can leave smaller businesses feeling neglected by leading providers. DigitalOcean competes ferociously on price, offering bandwidth starting at just $0.01 per gigabyte per month, 80% cheaper than its nearest competitor.
Depending on the configuration, deploying virtual machines with DigitalOcean can also be less than half the cost of an equivalent setup with Amazon Web Services. And some of DigitalOcean's monthly plans are even free as a starting point, making the company a no-brainer for small businesses. But it isn't just winning on price alone. Its user interface is designed for its target customers, with simple one-click features allowing for straightforward deployment.
DigitalOcean had a big year in 2021. Its customer base topped 609,000 businesses, with 99,000 of them paying at least $50 per month. In fact, its average revenue per user had hit an all-time high of $65.87 by the end of the year. It translated to $429 million in revenue, representing 35% growth over 2020, and the company expects revenue to cross the half-billion-dollar mark for the first time in 2022.
But the company estimates its total market opportunity is worth $72 billion this year, which will double to $145 billion by 2025, indicating it has a huge runway for growth. Wall Street agrees, with one firm, Oppenheimer, betting that DigitalOcean stock could soar by 92% to $96 a share.
Image source: Getty Images.
2. The case for Carvana
Buying a used car can be an unpleasant, time-consuming experience. It usually involves visiting different dealerships in your local area, or pursuing a private transaction with another individual. But we live in the digital age, so it was only a matter of time before that process was flipped on its head.
Carvana is an online-first used car dealer, leveraging technology to cover 81% of the entire U.S. population. Not only can prospective buyers select a vehicle without an in-person inspection, but Carvana also arranges delivery across the country. That's a level of reach the traditional dealership model just can't compete with. It's little wonder the company sold 425,237 cars in 2021, an impressive 74% more than it sold in 2020, highlighting the benefits of scale.
Carvana rode some strong economic tailwinds last year, which included soaring used car prices on the back of pandemic-driven shortages of new cars. Components like semiconductors were hard to come by, forcing car manufacturers to pull back on production and pushing would-be buyers into the used market instead. As a result, Carvana's gross profit per used vehicle sold rocketed 39% to $4,537, an all-time high.
While this strong environment won't be a long-term theme, the company still expects gross profit per unit to exceed $4,000 in 2022, in addition to growing sales to 550,000 vehicles for the year. Based on Carvana's growth, one thing is clear: Consumers are liking its business model, which makes the purchasing process far more convenient, and less time-consuming. That's almost certainly a durable trend.
The key risk for investors is that Carvana isn't profitable overall on a net basis yet, but it is moving in the right direction. Its long-term goal is an EBITDA margin of 8% to 13.5%, and in 2021 it finally crossed out of loss-territory to deliver a flat margin of 0.00%. That's after reporting a negative 23% result in 2016 and improving it every single year since.
One Wall Street investment bank, Morgan Stanley, is extremely bullish on Carvana's prospects. It thinks the stock could soar 242% to $360 a share, although that is a downgrade on its previous price target of $430. Still, both of those targets could disappear into the rearview mirror over the long term.