Growth stock investors have a lot on their minds so far this year. Many are looking for the best undervalued growth stocks to add to their portfolio. Inflation has been a significant recent concern. For several months, costs have gone up for everyone, including growth companies. Increased costs can decrease profits, especially for companies with low or even negative profits.
The Fed has said that it will most likely raise interest rates in 2022 and maybe beyond that to make matters worse. Investors often use interest rates to estimate the present value of a stock company’s future profits. When interest rates increase, the present value decreases. Not a good proposition for growth stocks.
You may have noticed that some growth stocks benefitted from the stay-at-home restrictions from the COVID-19 pandemic. For instance, Amazon (Nasdaq: AMZN) had one of its best years during the pandemic when customers had purchases shipped directly to their homes instead of going to a store. In addition, employees who worked from their homes conducted work meetings with Zoom (Nasdaq: ZM). As regulators ease COVID-19 restrictions, investors believe growth might not keep up over the next few years.
To add fuel to the fire, the situation between Russia and Ukraine has escalated. The tension has added worries to the stock markets.
Down for the Year
Investors have sold off growth stocks since the beginning of the year. For example, the Vanguard Growth Index (NYSE: VUG) is down over 14% year-to-date. The index tracks growth stocks like Tesla (Nasdaq: TSLA) and Meta Platforms (Nasdaq: FB). Respectively, those stocks are down roughly 57% and 37%. Meta Platforms is formerly known as Facebook.
Opportunistic growth investors may be on the lookout for undervalued growth stocks. Some may believe the reasons for growth stocks declines are temporary or short-lived. If they are correct, growth stocks could move higher in the long run.
Best Undervalued Growth Stocks
Between 2016 and 2018, famous investor Warren Buffett bought hundreds of millions of shares in Apple (Nasdaq: AAPL) for his company, Berkshire Hathaway (NYSE: BRK-B, BRK-A). The company’s investment was around $36 billion.
At that time, investors were worried about the growth of iPhone sales. The iconic Apple smartphones had grown sales swiftly in the years prior. Apple shares declined when investors believed sales could not keep up with its past success.
What investors looked past was how much iPhone users loved their smartphones. Customers continued to buy new versions, pay higher prices, and purchase add-on services like iTunes. In addition, customers outside the U.S. also continued to purchase iPhones.
Berkshire’s original $36 billion investment has grown to roughly $120 billion. Over that period, shares rose nearly four times. Apple shares are now the largest holding in Berkshire’s portfolio.
Long-term investors of Microsoft (Nasdaq: MSFT) have benefitted similarly. Years ago, the market believed Microsoft had become a mature company, and high growth could not continue. Over the last decade or so, Microsoft has grown its gaming business, made several savvy acquisitions, and has grown its Office business. Microsoft shares have risen about 10x over the last ten years.
Best Undervalued Growth Stocks for 2022
Let’s face it; it’s impossible to know where the market will do for the remainder of 2022. With growth stocks taking a beating so far this year, there could be some diamonds in the rough for long-term investors. Below are a few ideas for readers to consider.
- The Walt Disney Company (NYSE: DIS): Disney has been growing its streaming platforms, Disney+ and Hulu, in recent years. Disney also owns ESPN. Many streaming platforms are out there, but Disney has additional channels to monetize its movie and TV content that others don’t have. For instance, once content becomes widely popular, Disney can sell merchandise and add attractions to its theme parks.
- Adobe Inc (Nasdaq: ADBE): Adobe creates and sells software web design, online marketing and e-commerce. The company is the creator of Photoshop, which is a must-have for online content. Shares are down with the rest of the growth stocks this year.
- Qualcomm (Nasdaq: QCOM): Qualcomm’s microchips are the backbone of most smartphones across the globe. The company’s position in smartphones should be a positive for the company. Smartphone makers will be introducing new 5G versions over the next few years. Qualcomm also has invested in designing chips for electric vehicles. Over the next decade, industry analysts predict the growth of electric vehicles to be massive.
- The Trade Desk Inc (Nasdaq: TTD): The Trade Desk helps its customers create and manage digital ad campaigns. The company is expected to benefit from trends toward streaming and connected TVs. Last year, Apple changed its data collection policy. And the change could lead to those advertisers doing more business with companies like The Trade Desk.
As always, make sure you understand the companies in which you invest. You won’t know if your stock is an undervalued growth stock until short-term fears disappear.