After a bull run in U.S. growth stocks for several years, investors have grown increasingly wary of investing in them since 2021. However, if one can look beyond the current turbulence, there are some worthy growth stocks for longer-term investment. PayPal (NASDAQ:PYPL) and Palo Alto Networks (NASDAQ:PANW) are two such gems that should find a place in your portfolio now.
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From October 2021 through September 2022, growth stocks have declined massively. This was somewhat expected at some point, given the heightened valuations. Moreover, money-losing growth stocks are typically capital-intensive, requiring heavy amounts of investment to run. With inflation scorching the markets and interest rates hurting the pockets of these companies, raising capital has become more expensive than ever. This kept investors away from growth, reflected in the 34% decline in the Vanguard Growth ETF (VUG) this year.
Nonetheless, instead of going down the path of recency bias, having a longer-term view when choosing growth stocks can be a boon for your wealth. Here are two stocks to consider.
PayPal (PYPL)
Digital Payments platform PayPal benefited remarkably during the peak of the pandemic. Lockdowns had made online payments the only mode of payment across the world. However, with the opening of economies, other payment methods have opened as well, creating a sort of sudden demand void. As a result, the stock has fallen around 65% since the beginning of the year.
Nonetheless, in its latest quarter, payment volumes rose 14% year-over-year on a constant-currency basis. Moreover, it broke out of a two-quarter-long spell of having net debt on its balance sheet during the third quarter. The company posted $1.8 billion in free cash flow, up 37% year-over-year. These numbers give us a peek into PayPal’s solid financial position.
Looking at its valuation, the stock is trading at around 17 times forward adjusted earnings estimates, which looks like a steal given the five-year average of around 39 times.
What is PYPL Stock’s Price Target?
The average price target for PYPL stock is $106.64, which indicates nearly 55% upside potential over the next year. Moreover, a Strong Buy consensus rating based on 21 Buys and seven Holds is also worth considering.
Palo Alto Networks (PANW)
Palo Alto Networks is one of the top worldwide network security solutions providers for enterprises, service providers, and government entities. The company was also among those that benefited from the burgeoning demand for network security in 2020 with the rise in online activity especially working and learning from home. However, being a player in a highly-competitive industry, Palo Alto needs to constantly and aggressively invest in growth initiatives. This, unfortunately, got very expensive this year.
Nonetheless, consistent deal wins are driving Palo Alto’s business, thanks to the rising adoption of the company’s next-generation security platforms.
Turning to its valuation, Palo Alto stock is now trading at around 7.3 times sales, which is a discount over the last year’s multiple. It looks like a good time to consider buying PANW. The stock is also down 22% year-to-date.
Additionally, prospects of the cybersecurity space are bright, which automatically makes Palo Alto a beneficiary, given its clout in the industry. Gartner (NYSE:IT) predicts overall cybersecurity spending to grow by 11.3% next year to $188 billion in the face of the increasing threat of sophisticated cybercrimes.
Is Palo Alto Stock a Buy, According to Analysts?
Bulls are running for Palo Alto on Wall Street with a Strong Buy consensus rating based on 26 Buys and three Holds. The average Palo Alto stock price target of $219.93 suggests 55.7% upside potential.
The Bottom Line: Growth Takes Time
Growth stocks take time to shine. The heavy investments and expenses now create the foundation for solid wealth appreciation for shareholders in the future. Despite getting beaten down this year, 2023 holds better prospects for PayPal and Palo Alto.
Moreover, some volume of tax-loss selling could be seen in this final week of the year. This may push growth stocks further down this week, creating an opportunity to buy these underappreciated names for 2023.
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