DOCN - Comeback Of Growth Stocks: 3 Stocks To Play The Turnaround

2023-11-03 09:46:33 ET

Summary

• High-growth tech firms are experiencing a resurgence in their stock prices as growth reaccelerates.
• Companies like Shopify, Roku, and Palantir have seen their stock prices leap by more than 20% following strong earnings.
• DocuSign, Lyft, and DigitalOcean Holdings are three stocks that could represent opportunities for investors in the tech sector.

The latest earnings from growth stocks that gained prominence during the pandemic show a significant resurgence as their growth remains resilient, underscoring the secular shift toward technological solutions. Companies like Shopify ( SHOP ), Roku ( ROKU ), Pinterest ( PINS ) and Palantir ( PLTR ) have seen their stock prices leap by more than 20% following earnings that exceeded expectations. Some growth stocks have more than doubled from their pre-pandemic lows, after dropping sharply in last year's tech rout .

The sustained demand for technology-based solutions suggests that other businesses in the sector may also experience similar uplifts, potentially yielding considerable gains for investors. Hence, here are three stocks that could represent opportunities for investors aiming to capitalize on the revival of growth stocks.

1. DocuSign ( DOCU ): As revenue slowed significantly after the pandemic, shares are down nearly 90% from the all-time high reached during the pandemic. Increased competition from larger players such as Adobe ( ADBE ) is additionally adding to negative investor sentiment. Nevertheless, DocuSign's fundamentals remain strong, commanding a 70% market share of the electronic signature market. While growth has slowed, DocuSign's free cash flow nearly doubled from last year and is on the trajectory to hit $1 billion annually. Its valuation is also at all-time lows, trading at just 14 times Price to Free cash flow. Q3 earnings are expected to be reported on December 14 - if DocuSign is able to re-accelerate its revenue growth shares could surge.

2. Lyft ( LYFT ): As Lyft has lost ground to market leader Uber ( UBER ), its market share in the ride-hailing market slipped to only 26% from 38%. Revenue growth is stalling, and its insufficient scale leaves little room for profitability. Nevertheless, Lyft's management shakeup could pave the way for a turnaround. After all, Lyft's active drivers and riders continue to grow amidst strong overall demand for ride-sharing. The company's balance sheet remains solid too, with $1.7 billion in Cash against $1 billion in long-term debt. While the company faces significant challenges going forward, the negative sentiment is priced in at a valuation of 0.8 Price to Sales, compared to Uber and DoorDash ( DASH ), which trade at 2.5 and 4.3, respectively.

3. DigitalOcean Holdings ( DOCN ): Shares of the cloud infrastructure provider dropped from over $120 to under $20, as the company's growth trajectory disappointed . To make matters worse, the company announced the plan for CEO Yaney Spruill to step down, accelerating the stock's sell-off. However, DigitalOcean's innovative solutions for SMBs continue to drive double-digit revenue growth with EBITDA margins reaching nearly 40%. At a 15x forward P/E ratio, shares are attractively valued given its large total addressable market.

Takeaways

The comeback in high-growth technology stocks demonstrates that long-term technology trends very much remain intact. The rebound in some written-off tech darlings is a testament to Warren Buffett's idea to 'be greedy when others are fearful.' While there might still be chances to benefit from this turnaround, it's important to note that not every one-time high-flying stock will fly high again, so a careful, balanced risk approach is key.

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