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The best investors view stock market corrections as opportunities. When prices come down temporarily, investors can buy on the dip. Buying high-quality stocks at a discount is a great way to improve returns over the long term. These three stocks all have strong growth prospects and have recently become much cheaper.
1. Alteryx
Alteryx (NYSE: AYX) produces software that drastically improves the efficiency of data science and analytics. Through automation, Alteryx enhances the capabilities of its clients’ data scientists while reducing costs. Digital transformation is a major theme for businesses of all sizes, and Alteryx is one of the companies pushing that process forward.
Image source: Getty Images.
You can see how investors got excited about the stock. Its price-to-sales ratio rose to around 25 after it recovered from the coronavirus market crash in 2020. Capital was flowing to tech stocks with high growth potential, which wound up fueling an extended downward slide for Alteryx shareholders.
The company reported slowing sales growth throughout the year. After 20% growth in 2020, Alteryx only managed an 8% expansion in 2021. At the same time, high valuation stocks were struggling as investor risk tolerance diminished. The combination of unsustainable valuation and slowing growth doomed Alteryx stock, and it’s now down about 70% from its recent peak.
AYX PS Ratio data by YCharts.
A lot of risk has been removed from Alteryx stock. Its price-to-sales ratio is down to 6.7 now, and there are plenty of reasons to be optimistic. While overall growth was weak, recurring revenue climbed 30% last year, which bodes well for cash flow stability. Alteryx is forecasting more than 30% revenue growth in 2022. The company has nearly 8,000 customers, and its net revenue retention is just shy of 120%. It’s not profitable, but it’s free-cash-flow positive — meaning Alteryx isn’t under financial duress as it pays for ongoing growth.
If Alteryx is able to meet its potential, there’s plenty of room for market-beating returns for investors.
2. Block
Block (NYSE: SQ) is the disruptive fintech stock formally known as Square. The company built a revolutionary payment-transfer platform for small businesses. It followed that big victory with its consumer product, CashApp. CashApp quickly grew past 70 million active users, who have embraced the app’s payment, transfer, and investment functions. Notably, CashApp makes it very simple for users to buy stocks and cryptocurrencies.
Block’s results have been fairly volatile, but it’s growing quickly. Block’s reported revenue is somewhat misleading because it records sales of Bitcoin to CashApp users, which are almost fully offset by the cost of purchasing that Bitcoin. Its gross profit controls for that effect, and its gross-profit growth rate has ranged from 40% to 90% over the past year.
That performance got investors hyped up, and the stock climbed to a price-to-sales ratio of 13.6 and forward PE above 185 at the end of 2020. Block’s forward P/E ratio has since fallen to 60 amid the growth stock sell-off. The stock’s volatility has increased substantially due to its close association with Bitcoin and cryptocurrencies.
Block has proven itself with two different successful fintech businesses, and it’s aiming to remain in its role as a disruptor. The company is acquiring Afterpay, which will further increase its user base. It’s also launched a chartered bank that can expand the financial services offered to consumers and businesses through Block’s products. As the rebranding suggests, it will lean on blockchain technology to improve the efficiency and quality of all these solutions.
Block will remain volatile as the Bitcoin market rises and falls, but the long-term growth opportunity is appealing if you can buy during a sell-off.
3. Salesforce.com
Salesforce.com (NYSE: CRM) is the unrivaled leader in customer relationship management (CRM) software. Its products are deeply embedded in the sales and account management processes for more than 150,000 customers. Gartner ranks it as the class of its market, with a 24% market share. The closest competitor is well behind, with a 5.5% market share. Salesforce.com’s growing suite of cloud-based and AI-enabled products encourages optimism that it’s not just resting on its laurels and transforming into a stagnant leader.
These factors combine to create a wide economic moat. Salesforce.com is also growing rapidly, reporting a 27% revenue expansion in the most recent quarter. Those are all major bullish signals for long-term investors.
The only downside here is valuation. Salesforce.com stock is down 30% from its 2021 high, but its valuation ratios are still somewhat high. The stock’s forward P/E ratio is around 45, and enterprise-value-to-EBITDA stands at 50. Those are a premium to some of the established tech giants, but the valuation is much more rational now. Salesforce.com’s share price is now low enough to create room for long-term growth, and that deal only gets sweeter if the market sells off even further.
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Ryan Downie owns Block, Inc. and Salesforce.com. The Motley Fool owns and recommends Alteryx, Block, Inc., and Salesforce.com. The Motley Fool has a disclosure policy.
