These growth stocks appear undervalued today, which could lead to significant price appreciation during the next bull market.
The S&P 500 has rebounded from its bear market lows throughout the year. But the next bull market will not officially begin until the index surpasses its previous record high, meaning it must climb 5% from its current level. That threshold is important because the S&P 500 returned an average of 169% during the bear markets that have taken place since its inception in 1957.
Investors who want to benefit from that upward momentum should be buying stocks today, and PayPal (PYPL -0.85%) and SolarEdge Technologies (SEDG 2.05%) are worth consideration. Both stocks trade at discounted valuations compared to their historical averages, and some Wall Street analysts see substantial upside for shareholders.
Here are the details.
1. PayPal: The leading online payment processing company
Brett Horn of Morningstar has a 12-month price target of $135 per share on PayPal, implying 140% upside from its current price. The bull case for the fintech company centers on the growing prevalence of electronic payments across physical and digital sales channels, as well as the brand authority and market presence PayPal has cultivated over the years.
Unlike most payment processors, PayPal operates a two-sided network that provides financial services to merchants and consumers. That allows the company to collect data from both sides of the transaction, and PayPal uses that data advantage to improve authorization rates and reduce loss rates for merchants. In fact, management says it has the best authorization rates and the lowest loss rates in the industry.
Moreover, PayPal has built considerable trust with consumers. A recent study from Nielsen shows a 33% uplift in conversion rates when PayPal is available at checkout, which reinforces its value proposition to merchants. The upshot of those advantages is that PayPal dominates the online payment processing space. It currently holds 41% market share, nearly twice as much as its closest competitor, according to Statista.
PayPal reported solid financial results in the third quarter. Revenue increased 8% to $7.4 billion and non-GAAP net income climbed 14% to $1.4 billion. Investors can expect similar momentum in the coming years. Retail e-commerce sales are expected to grow at 8% annually through 2030 and PayPal should at least match that pace given its strong market presence.
Indeed, Brett Horn of Morningstar estimates that PayPal will grow sales at 11% annually over the next decade. That forecast appears reasonable, and it makes the current valuation of 2.1 times sales look cheap, especially when the three-year average is 7.1 times sales.
There is no guarantee shareholders will see triple-digit returns in the next year. But patient investors should feel comfortable buying a small position in PayPal stock today.
2. SolarEdge Technologies: The second-largest solar inverter company
Analyst Andrew Percoco of Morgan Stanley has a price target of $176 per share on SolarEdge, implying roughly 124% upside from its current price. The bull case centers on the growing prevalence of solar energy systems, as well as the strong presence SolarEdge commands in the inverter space and its opportunities to expand in adjacent markets.
SolarEdge benefits from brand authority and scale. The company disrupted the solar industry with its invention of the power optimizer, a device the optimizes power generation by allowing each solar module to function independently. One consequence of that innovation is that the SolarEdge brand carries weight with distributors and manufacturers, and that advantage has propelled the company to the forefront of the market.
Today, SolarEdge is the second-largest solar inverter company in the world and the largest outside of China, which lays the groundwork for steady growth in the coming years. But the company has also expanded into adjacent markets, including monitoring and energy management software, electric vehicle chargers, and battery storage solutions for residential and commercial end users.
SolarEdge struggled in the third quarter as high interest rates and excess channel inventory crushed demand, especially in Europe. Revenue declined 13% to $725 million and non-GAAP net income turned negative, with the company reporting a loss of $31 million. Management expects inventory issues to persist for a few more quarters. But long-term investors still have reason to be optimistic, as SolarEdge has several tailwinds at its back.
Specifically, governments worldwide are incentivizing the adoption of solar power. For example, President Biden signed the Inflation Reduction Act into law in the U.S. last year. That legislation extends the tax credit for residential solar installations through 2034, and it offers other incentives for residential and commercial projects. Additionally, Straits research says solar inverter sales will increase at roughly 6% annually through 2030, while solar battery sales are projected to increase at roughly 16% annually during the same period.
On that note, Andrew Percoco of Morgan Stanley expects SolarEdge to grow revenue at 9% annually through 2035. That forecast makes its current valuation of 1.3 times sales look like a bargain, especially when the three-year average is 7.1 times sales. There is no guarantee shareholders will see triple-digit returns in the next year, but patient investors should feel comfortable buying a small position in this undervalued growth stock today.
