2 Hated Growth Stocks Down Right Now — Should You Buy?

Welcome back to the channel, everyone. Uh today, my co-host Neil and I are going to be breaking down two more undervalued stocks to buy right now. If you guys missed Monday's video, we talked about a couple stocks that have been really beaten down by the market and unjustifiably so, in our opinion. And we wanted to continue that and do another video on a couple more stocks that we think represent really compelling value opportunities right now in a market that I think it's fair to say is quite overvalued. >> Yeah, I mean, on Monday we talked about two companies, I would say, that do generate a lot of revenue from the same the same business uh segment. In today's video, it's two completely different companies, but they do share one thing in common. Both of these stocks are down significantly uh year-to-date. Now, it it's quite interesting when we look at undervalued names, because for me it could be undervalued, for someone else it might be a value trap. So, do let us know down in the comment section below what undervalued stocks you own, you believe these companies are value trap, undervalued, let us know as well, so we can maybe cover more companies in the future. But, yeah, Rachel, we did talk about two great companies on Monday. Today, we're going to cover two others. Usually, when you look at, let's say, undervalued names, are you only looking at, oh, a low PE, or are you looking at stock is down a lot, maybe a combination of both, or or something else? >> I think it's a really important question, because obviously valuation multiple is key. Price to earnings is something important to look at. But, how much a stock is down and even what their valuation multiple is, pick your preferred metric, right? That alone does not tell you about the growth story of the business. So, for me, when I'm thinking about an undervalued stock, I'm thinking about a company that I think is undervalued relative to its long-term earnings growth potential, relative to its long-term growth story, and that I don't think the market is fully pricing that into its current valuation. That's how I think about it when I'm looking for undervalued opportunities. And I will say it's much harder to find those >> [laughter] >> in certain quarters of the market, particularly in in tech, than it was a few years ago. And you know, there are I think a plethora of wonderful businesses that aren't cheap, but they can certainly grow investors' portfolios over the long run. But we thought it would be fun to talk about a couple businesses that maybe the market's discounting right now and and could provide some opportunities for long-term shareholders. >> Yeah, and so I'll start off today with one of my favorite companies out there, which is SoFi. Now, I know whenever we talk about SoFi Technologies, people automatically think, "Oh, what's so interesting about a bank?" Well, let me just say, you know what? Let's say it is only a bank. It is only a bank that's worth $23 billion, a trailing PE of 37.6 times, which for banks is quite expensive. A forward PE of 24.5 times, which here as well, it is cheaper, but for just a bank, it is maybe too expensive. Well, the thing with a SoFi is that, unlike traditional banks, this one is growing at 30% this year. I mean, they they project it to grow at a compound annual growth rate through 2028 at around 30%, maybe even more. EPS EPS is actually expected to grow much faster than that also through 2028. And so, you know what? You can call it a bank. I don't mind. But the reason why certain names do get a higher multiple or a premium is because they are growing much faster. This is a company that is growing faster and also becoming more and more profitable. Now, more recently, we can add some optionality. We have a stablecoin business. We have crypto coming back to the platform as well. Those are nice extras. Now, if you look at for example, can use the term here as well average revenue per user or per customer at SoFi, compare that to big banks, it's still very, very early days. They can still monetize each and every user much, much better. Now, it's not all roses, right? It's not all great at SoFi because there is one segment of the company which is the tech platform Galileo. It's their proprietary technology stack which, okay, helps the core business become a better, move much faster, but this was supposed to be as some called it the AWS of fintech. >> Mhm. >> Well, it never happened. It never happened. Uh growth slowed down, growth actually declined year-over-year, but from the recent results, it seems like growth or the slow in growth has bottomed. And if we did have a a bottom last quarter, then I just see this as, you know what? Here as well, an extra to the business. An extra push for growth that is now coming from a business segment that yes, has been extremely disappointing uh before and right now, I'll be honest when I look at SoFi, I'm not even looking at the tech platform anymore. I'm only looking at, well, the lending side which has been doing extremely well and on the financial services side as well which also has been growing very rapidly. Now, what's interesting is their loan platform business, you would think it falls under the lending segment, but no, it falls under the financial services segment and the loan platform business is a high margin, lower risk type of a business which is also growing super quickly, helps the business grow fast, become more profitable. We have SoFi Plus which is a the services and I know, another subscription service? Yes, but I do think that the value that you're paying for it as a member, everything that you get, it does make sense, and that's also one of the ways that they continue to monetize each and every user, make sure that the user participates more in the ecosystem that SoFi is trying to build. It is still very early days. I understand that there are people that only look at it as a bank. They have a bank, which is great, which is why this company is doing extremely well despite high interest rates. Guidance, for example, they came into this year expecting rate cuts. Guidance hasn't changed. Until last quarter, they actually increased it revenue-wise. Despite their outlook becoming worse and worse. To me, that just portrays strength. They're now expecting one to two rate hikes for this year. Seems like the market is pricing in one to two rate hikes. Are we going to get two? I don't know. I think we're definitely going to get one. But if we get only one and they're pricing in two, that's pretty good cuz then they'll just beat or at least meet their own guidance. PE-wise, I think it's trading at around 16 times uh the 2028 target that the company itself has put out. So, all in all, it's a very cheap name. Of course, if you're not interested in owning a bank or a fintech name, then maybe it's not for you. But if you do like a high-growth company that is becoming better and better, more profitable, and has actually executed extremely well over the last couple of years where technically speaking, they shouldn't really be around anymore because lending was a big part of their business before. Was a big problem with lending. So, it should have been left behind. They did survive. They did come out of that situation as a much stronger company. So, I had to put SoFi again here on on the list. >> I'm glad you did cuz I think there's been a lot of kind of this debate of okay, are they a fintech, are they a traditional bank? They're not valued like a traditional bank. How do we think about this business? And I think the argument that you put forward is is really strong, and essentially it's that this is a company that operates much more like a vertically integrated tech ecosystem than a traditional bank. I mean, you know, traditional banks rely heavily on the difference between the interest they pay on deposits and the interest they earn on loans, which is your net interest margin. And SoFi structures their operations around this kind of multi-pronged framework, where they're able to maximize their customer lifetime value, and then they are able to keep a lot of those other costs more on the lower side. And the lending segment, which you mentioned, you know, this has been their largest revenue contributor. It focuses on, you know, personal loans, student loan refinancing, mortgages, and they they hold loans for interest, but then they also package bundles of these loans, they sell them to institutional investors at a premium, and so they generate fee revenue that way. They free up as well capital to issue new loans. There's the the financial services segment, right, which you talked about, which is the checking, savings, credit cards. Um and then there's obviously the technology platform, the Galileo Technisys, where they essentially license their core banking software, payment processing, and API infrastructure to other fintech companies and, you know, digital banks and so forth. And I point this out because I do think there's sometimes a lot of confusion about what makes their business different, and I think this really [clears throat] highlights where you can kind of separate it from a traditional bank. And you know, they've traditionally targeted higher-income tech-forward consumers. That's tended to give them a bit of a more resilient profile as well than traditional banks in addition to their business model. For me, the risks that I watch here are, you know, they're not all really specific to the business. I mean, you think about consumer credit card and personal loan payments have been the lateness of those has been quietly kind of ticking upward across the country. So, that could test SoFi's kind of prime demographic. If we see a scenario where some of the bigger institutional buyers maybe pause buying loans at the pace they are, that could also be an element to watch. Another thing, too, I mean, holding a federal banking charter, they have a lot of, you know, government capital ratio requirements. There's much more intense scrutiny that happens because they hold that charter. So, all of these things, I think, are risks to watch, but I do think it's a really interesting business if you're looking at interest at both the fintech space and the traditional banking space and are wanting to maybe capitalize on a more modern version of that framework. >> Yeah, I would highly suggest to make a difference between a stock that is down in a business that has been executing time and time again. And I think it it ties very well to the next stock that you want to cover. >> Yes. Well, I feel like this is one that there there's going to be a lot of agreement and disagreement in the comments about Adobe. You know, this is one of those companies that was hit by the SaaS apocalypse earlier this year. You know, there's been this, I think, concern that because of the rise of generative AI tools, AI agents, the prevalence of that technology, but also how incredibly accurate and more useful it's getting, that you're going to have a essentially almost all software companies just go completely defunct. I think that there are absolutely software companies that exist right now that will not be here 3 to 5 years from now. That is certain. However, you have to look at a company by company, you know, basis. You have to look at each platform individually. I personally think Adobe is an example of a company that has been really underestimated by the stock market, particularly as we look at how the business is actually doing, right? You know, you have to separate that from the stock. So, they just had an a record quarter. They pulled in $6.6 billion in revenue. That was up about 13% year-over-year. 28.6% profit margin. Now, their trailing PE ratio right now is just right around 16. You compare that to their 10-year historical average, which was in the 40s. I mean, this is essentially a company that has lost about 2/3 of its valuation premium based on fears that AI is essentially going to completely ruin the business. Now, I want to talk about the bear case, and then I'm going to talk about kind of my more bullish thesis here. So, the bear case essentially assumes that, you know, free or cheap AI tools are going to just demolish their business. That if anyone can type a prompt into a web browser, you get a clean graphic, a video in 5 seconds, who's going to pay hundreds or thousands of dollars a year for an enterprise Adobe subscription. Now, I think that this actually kind of misinterprets how real professional design works. Uh you know, when you have a big marketing team or design agency, they need the exact pixel control, layer-by-layer editing tools, secure collaboration, and that's exactly where AI is helping Adobe monetize its business uh in a in a age where they are having to pivot their tools to stay more relevant. So, Adobe built its own AI engine called Firefly, and they built that directly into the core code of Photoshop and Illustrator. And so, instead of, you know, users leaving Adobe to experiment with other AI tools, they can generate backgrounds and fill images instantly right inside their existing uh workspace. And Adobe's AI-driven apps are seeing recurring revenue triple year-over-year. Their business and consumer segment grew 16% in the most recent quarter to just under 2 billion. That was because of their new AI features in Acrobat, Adobe Express. They have over $22 billion in contract backlog that's locking in future revenue. That lends a lot of stability to their subscription business. Um they have an operating margin of over 40%. You know, in Firefly, this this has been their core tool that they've optimized for AI. This is specifically built for that localized asset creation. So, their cost to generate an AI image is really a fraction of what a lot of the standalone AI companies are spending, which I think is also really important to note. Um instead of, you know, replacing a lot of their tools, AI has been used by Adobe to be integrated directly into its ecosystem. And those AI-first features are what is sending consumption and therefore recurring revenue for the business soaring. And so, I would say, you know, the critics would say that the software-as-a-service is dying. For some companies, that may be, but I think Adobe, they're, you know, continuing to deliver double-digit organic revenue growth. They have outstanding margins. You know, one other thing, management launched a $25 billion share repurchase program running through 2030, kind of signaling their confidence uh in the stock. So, I think this is an interesting business. I think that we have to look at what has been happening with software stocks and software businesses and understand that while there are certainly elements that can be replaced and while there are certainly companies that are saying they're rolling out AI tools to try to mask a failing business, that is not the case across the board. I personally think Adobe is an example of one of those companies that's actually doing a really good job of monetizing AI and driving their business forward. So, it's an interesting one to chat about. I am sure there will be plenty of people in the comments disagreeing with me, but I thought it'd be a fun one to bring to today's conversation. >> I spoke with some some folks at Adobe and there are two sides of the business. There is the creative side of the business, which the majority of us know, Photoshop, Premiere Pro, Illustrator, but there is the other side of it, the marketing side, the the commercial side of things that we as individuals might have never touched it. And the enterprise is is part of the business where they're making a lot a lot of money. It's the whole Adobe ecosystem that I just don't see an AI chatbot replace anytime soon. That's it. That's it. A CFO leaving, a CEO stepping down, especially right now, doesn't help when the stock is already under pressure. Now, they are still growing, they're still extremely profitable, they're buying back a ton of shares. Stock is actually up close to 50% from the bottom a couple of months ago and only down around I think 12% or so year-to-date. So, they're doing better than than feared, I would say. But with Adobe, they are in a position where they they cannot they cannot permit themselves not to execute because they are in a very good position. Because yeah, if they do not execute correctly, I can see parts of their business being disrupted. And once you lose part of your business or part of your, let's say, competitive advantage, it can hurt the future of such a profitable company. >> I agree, and I think those are the really important risks to keep in mind. You know, I personally am bullish on the business, but I also am very aware of the risks that, you know, I highlighted, that you highlighted, Neil. And I think it's also important, you know, I'm not saying to go out and uh you know, go all in on Adobe stock by any means, but I do think that it is an example of one of those businesses that has been hit very hard by the SAS apocalypse. You know, that the stock has rebounded a bit in recent months. Um but you look at the core business and there is really a disconnect from some of what we've seen with the stock's movements. You know, this is a profitable, high-cash-flow business. The growth they're seeing from their AI tools means that all of these enterprises, you know, the bulk of their revenue profits is derived from the large companies that they're working with, right? Not individual users or creators. Those enterprises are continuing to see value in those tools, and they're using up even more consumption credits, which means they upgrade to higher tiers, which means their recurring revenue grows even faster. So, an interesting company to at least maybe put on your watch list if you are watching the movements in the world of software stocks, and you're curious to see how a stock like this performs moving forward. Uh well, thank you for joining us today, guys. That wraps up our two undervalued stocks for today. Let us know in the comments below which of these companies you might be interested in buying right now, if you think any of them are actually value traps and you completely disagree with our thesis, let us know that in the comments, too. Uh we we love to interact with you guys, and make sure to hit that subscribe button, turn on notifications, and Neil and I will see you all in the next video.