Growth stocks have been pummeled recently. While this is partly evidenced by the tech-heavy Nasdaq Composite‘s 6% slide since Feb. 13, this doesn’t fully capture the beating many growth stocks have taken since the Nasdaq isn’t comprised entirely of growth stocks. Many growth stocks have fallen even further during this period.
While sell-offs are painful for shareholders, investors should keep in mind that lower prices lead to greater long-term prospects (assuming nothing has changed about the underlying business’ long-term potential). In fact, this pullback has created buying opportunities in some growth stocks. Two that are looking particularly attractive are streaming-TV giant Netflix (NASDAQ:NFLX) and cloud-based contact center specialist Five9 (NASDAQ:FIVN). Indeed, it wouldn’t be surprising to see both of these companies’ stocks double from these levels over the next five to seven years.
Shares of Netflix are down 8.3% since mid-February, creating a nice entry point into the streaming-TV company’s stock during a pivotal time for its business. The company is finally crossing over from regularly burning through cash to generating free cash flow (FCF). This is happening as Netflix’s scalable business model is hitting a tipping point in which revenue generated from subscriptions is starting to surpass costs of the rest of its business, which include the massive upfront expense that comes with original content production.
“We believe we are very close to being sustainably FCF positive,” Netflix said in its fourth-quarter shareholder letter. “For the full year 2021, we currently anticipate free cash flow will be around break even (vs. our prior expectation for -$1 billion to break even).” Indeed, Netflix management said that it believes it no longer needs to raise external financing. Going further, Netflix is even exploring the possibility of returning cash to shareholders through ongoing stock buybacks.
Additionally, analysts importantly think there’s plenty of strong growth ahead for Netflix. On average, analysts expect Netflix’s earnings per share to grow at an average rate of 44% annually over the next five years as the company benefits from the inherent operating leverage in its business. With earnings potential like this, the company’s price-to-earnings ratio of 84 sounds like a reasonable valuation to pay up for this stock.
Five9 stock has fallen even more than Netflix recently. The tech stock is down more than 10% since mid-February.
Though Five9 isn’t as established as Netflix, with its trailing-12-month revenue coming in at just $435 million compared to Netflix’s $25 billion, the company seems to be earlier in its growth story. Indeed, its revenue is growing much faster. Five9 fourth-quarter revenue increased 39% year over year to $127.9 million.
“Our performance underscores our leadership in the market and momentum on our mission to help customers modernize and transform their contact center and reimagine their customer experience,” said Five9 CEO Rowan Trollope in the company’s fourth-quarter earnings release.
Five9 is certainly a riskier stock than Netflix since it doesn’t have the clear leadership position in its industry that Netflix has among streaming competition. But with a much smaller market capitalization (less than $11 billion), there’s significant upside potential over the long haul if Five9 can continue growing rapidly and capitalizing on the opportunity of the digitization and modernization of contact centers.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.