Three Growth Stocks Dropping by 21%, 22%, and 28% respectively, offering potential purchasing opportunities in December
Three Growth Stocks Dropping by 21%, 22%, and 28% respectively, offering potential purchasing opportunities in December
This has been an outstanding year for broader indexes. Nevertheless, there are still numerous chances to acquire shares of undervalued stocks. Here's why patient investors might want to investigate Adobe (ADBE -2.37%), Fluence Energy (FLNC 2.60%), and GXO Logistics (GXO 1.93%) more closely as three promising growth stocks that have experienced significant declines but are worth considering before the new year.
Adobe's potential in AI, but expectations are high
*Daniel Foelber* (Adobe): Digital media software titan Adobe has seen a 22% decrease in value so far this year, despite a rally in the S&P 500** and a substantial increase in the technology sector. Adobe recently released its financial results for fiscal 2024, which demonstrated a 10.8% increase in revenue, reaching an all-time high with an 89% gross margin. Adobe's ability to achieve a high gross margin is largely due to the majority of its expenses being incurred through sales, general, and administrative expenses, as well as research and development.
The forecast for fiscal 2025 appears to be even more optimistic, with accelerated sales growth and non-GAAP (adjusted) earnings per share projected to be between $20.20 and $20.50. This translates to a forward price-to-earnings ratio of just 23 based on the lower end of this non-GAAP guidance, making Adobe seem like a moderate growth company at a favorable valuation.
However, Adobe's results and projections are not the problem. The uncertainty lies in Adobe's long-term prospects and concerns about its ability to monetize artificial intelligence (AI). Adobe has developed various AI-powered tools, such as text-to-image and video creation, AI-driven marketing solutions, and more. But thus far, these advancements have not significantly contributed to sales growth.
There are questions as to whether Adobe can prosper in an AI-driven enterprise software environment. To be fair, AI does have the potential to drastically disrupt Adobe's business model, which relies on high-volume subscriptions. Users may be unwilling to pay premium prices for Adobe's tools if competitors outperform Adobe in innovation. Alternatively, Adobe could produce such remarkable enhancements that customers opt for fewer subscriptions, resulting in negative growth.
These are risks worth considering before purchasing Adobe stock. Nevertheless, it would be a mistake to disregard Adobe's strengths. Adobe is a highly profitable software company with a 36% operating margin. Its balance sheet features more cash and cash equivalents than debt.
Adobe spends a significant amount on stock-based compensation, which is why its non-GAAP earnings are higher than its GAAP earnings. However, it has more than compensated for this expense through stock repurchases. Adobe's share count has decreased by 12% over the past decade due to buybacks. In contrast, Adobe's enterprise software peer, Salesforce, has diluted investors and seen its share count increase by 47% in the past decade.
Considering all of this, Adobe stands out as a leading tech company with an attractive valuation, making it a worthwhile investment for December and holding for several years to come.
A robust backlog boosts Fluence Energy's appeal
**Scott Levine (Fluence Energy): Fluence Energy reported strong fourth-quarter 2024 financial results earlier this month, giving investors plenty to celebrate. Despite this, the market remained unresponsive, focusing instead on the energy storage company's shortfall of analysts' revenue estimates.
As a result, Fluence shares have plummeted by more than 25%. When evaluating the company's performance across the entirety of 2024, the picture appears even more disheartening, with a nearly 30% decline in stock value. However, forward-thinking investors should disregard the market's frustration and recognize the long-term potential for the company and its stock to prosper.
Although Fluence fell short of analysts' predictions that it would record Q4 2024 sales of $1.29 billion (reporting revenue of $1.23 billion), it surpassed expectations on the bottom line, reporting $0.34 earnings per share as opposed to analysts' projection of $0.29. Additionally, the quarter showed promising signs.
For instance, Fluence reported approximately $5 million in free cash flow, resulting in an overall free cash flow of $72 million for fiscal 2024 — a significant turnaround from the negative $115 million it had in 2023. Moreover, the company ended fiscal 2024 on a positive note with respect to its backlog. As of Sept. 30, Fluence had a backlog of approximately $4.5 billion, representing a 55% increase over the $2.9 billion backlog it had at the same time in 2023.
With Fluence generating cash organically and exhibiting substantial backlog growth in 2024, growth investors have an outstanding opportunity to strengthen their portfolios with an energy storage stock that carries less risk than it did a year ago.
The future seems promising, too, with Fluence's substantial market potential. Business insight firm Mordor Intelligence predicts that the energy storage industry will grow at an exponential compound annual growth rate of over 14% from $51 billion in 2024 to $100 billion in 2029.
*Lee Samaha (GXO Logistics): Let's tackle the elephant in the room first. The recent dip in GXO's share price can be attributed to a Bloomberg report* indicating GXO's intention to stay independent, after considering potential sales. With several investors now absent from the stock market, it's a prime time to reevaluate the argument for investing.
The argument, even more compelling with the reduced share price, relies on the prediction that investment in e-commerce fulfillment is set to rise remarkably by 2025 and beyond. GXO specializes in designing and operating warehousing and logistics solutions for companies looking to offload non-essential operations.
To grasp this, we must travel back to the surge in e-commerce spending resulting from the COVID-19 lockdowns. These circumstances prompted numerous companies to speed up investments and boost existing plans. However, predicting the lockdowns would last multiple years was not feasible, leading to overspending. The subsequent correction came as lockdowns eased and high-interest rates restrained consumer spending.
Regardless, e-commerce spending rebounded in 2022, growing at a high single-digit rate, and maybe boosted further by lower interest rates on the horizon. In fact, GXO Logistics' heads believe that the underlying demand for e-commerce capacity is accelerating.
This increasingly positive outlook has led the management to aim for 10% annual revenue growth and 15% annual adjusted EPS growth from 2024 to 2027. With a trading value of less than 18 times estimated 2024 earnings and promising growth prospects, GXO still represents an excellent investment for growth stocks.
Investors might want to consider diversifying their portfolio by looking into undervalued stocks like Adobe, as it has experienced a significant decrease in value this year despite its strong financial performance and promising future in AI. However, the uncertainty lies in Adobe's long-term prospects and its ability to monetize artificial intelligence.
Patient investors might also be interested in Fluence Energy, as its robust backlog and positive cash flow make it an appealing investment opportunity for growth-oriented portfolios, despite its recent stock decline. The energy storage industry is predicted to grow exponentially in the coming years, providing a substantial market potential for Fluence.