2 growth stocks down 32% to 70% that scream buys

Investors have been abandoning growth stocks like hot potatoes for several months now. The economy continues to race towards volatility and investors are looking for safer opportunities with value stocks.

If you have enough time horizon to wait for what has already dipped into bearish territory, you can use these dramatic price drops to buy some great stocks at great bargain prices. Two that I recommend are Airbnb (ABNB -1.03%) and revolution group (RVLV 4.10%).

Airbnb: down 32% over the past year

Airbnb was a stock market darling when it went public almost two years ago. But even as it recovered from the decline of the pandemic, its soaring stock price fell with the market.

The recovery was strong. Second-quarter revenue rose 58% to $2.1 billion, well above pre-pandemic levels. The company has posted several quarters of positive net income, demonstrating that it can be profitable at scale. Management was able to grow it from a small room rental business to one of the biggest travel companies in the world – and certainly one of the fastest growing.

Airbnb looks like an interesting stock to own because of its future desirability. It has changed the way people go on vacation by offering a wide range of vacation rentals, and its platform model gives it a resource-constrained enterprise it is nimble and adaptable. Much of its success over the past two years has been fueled by local and long-term stays (28 days or more), characteristics that the traditional hospitality industry struggles to match.

Management expects growth to slow in the third quarter, but remain healthy at around 26% year-over-year. As Airbnb grows, it focuses on efficiency and profitability, which is certainly a litmus test of how well a growing company can sustain itself and deliver shareholder value.

At this price, the shares are trading at 41 times forward earnings. That would have seemed like a cheap valuation for a growth stock last year, but in today’s market, that multiple seems more expensive. Still, the stock price is up after hitting a low in June, and investors may think it’s already gotten the beating it deserves. Down 32%, it looks like an opportunity for forward-thinking investors.

Revolve Group: down 70% over the past year

Revolve Group was showing fabulous growth as more shoppers discovered its unique online presence during the pandemic. This is slowing as shoppers return to stores and inflation makes everything more expensive.

Still, it posted an impressive 27% year-over-year sales increase in the second quarter of this year with a net profit of $16 million. Third quarter forecasts were somewhat pessimistic. Management said July sales were up 10% from a year ago and year-over-year comparisons are only going to get tougher as sales increases in the third and fourth quarters of last year were exceptionally high.

However, management remains confident that over the long term, its model resonates with its target market and captures market share in a growing industry.

Like Airbnb, Revolve Group is a disruptor in its field. It sells haute couture entirely online and relies on artificial intelligence to drive all its operations, in particular the collection it curates. It offers 70,000 fashion products and can easily change its assortment based on customer interest, unlike physical stores with large inventory. Zooming in on customer preferences also allows her to make more full-price sales and achieve greater profitability.

The other characteristic that differentiates her model is the connection with celebrities and influencers. It has an influencer marketing program that fits right into its millennial and Gen-z audience targeting, reaching customers exactly where they are. Beyond that, the company offers all the benefits a competitive e-commerce player should, such as fast and free shipping and returns, including free international shipping on orders over $100.

Investors see problems, but there are many signs of growth. There were 124,000 new active customers in the second quarter, a record for a second quarter. This is a 39% increase over last year. The average order value increased by 19% and the total number of orders placed increased by 27%. Management attributed the operating margin pressure to higher fuel costs affecting shipping rates and a higher than expected return rate. He also said a “significant majority” of new customers were buying at full price; these customers generate higher lifetime value than those acquired through markdowns.

It looks like the situation could remain grim for Revolve over the next few months, but the long-term potential here looks very compelling. At this price, Revolve Group stock looks like an incredible opportunity.

Jennifer Sabil has positions in Airbnb, Inc. The Motley Fool has positions in and recommends Airbnb, Inc. and Revolve Group Inc. The Motley Fool has a disclosure policy.

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