Growth stocks have the potential to deliver tremendous returns. But after a brutal 2022 bear market, many high-flying growth names now trade at bargain valuations. This creates a compelling opportunity to grab hypergrowth innovation stocks at a discount.
In this comprehensive guide, we will analyze the prospects for 12 of the best cheap growth stocks to buy for 2023. All these stocks currently have low PE ratios compared to historical levels but have solid growth drivers that could power their next leg higher.
Table of Contents:
- What Are Growth Stocks?
- Why Growth Stocks Got Crushed in 2022
- Growth Stock Valuations Look Attractive Now
- 12 Best Cheap Growth Stocks For 2023
- Final Thoughts
What Are Growth Stocks?
Growth stocks represent companies that are expanding rapidly and expected to deliver earnings growth at a faster pace than the overall market. They typically have:
- Innovative products or services disrupting traditional industries
- Strong competitive advantages like network effects, patents, or brand loyalty
- Ability to gain market share in a large addressable market
- Visionary founders leading the company
- High research and development spending on future innovations
Growth stocks usually have high price-to-earnings (P/E) ratios reflecting investors’ willingness to pay a premium for their enormous growth potential. A high P/E ratio also indicates the company is focused on growth rather than paying dividends.
While growth stocks offer tantalizing upside, they carry higher volatility and risk compared to value stocks. But patient investors who hold through temporary pullbacks can realize exponential gains from identifying hypergrowth stocks early.
Why Growth Stocks Got Crushed in 2022
Growth stocks absolutely cratered last year as the Fed hiked interest rates aggressively to fight inflation. The Nasdaq 100, heavily weighted in tech and biotech growth names, plunged 33% in 2022.
Higher interest rates hit future cash flow dependent growth stocks especially hard for several key reasons:
- Makes future earnings less valuable today
- Increases discount rates used in valuation models
- Causes investors to shift into dividend yielding value stocks
- Strengthens dollar hurting international earnings
- Slows economic growth reducing revenue
On top of rising rates, growth stocks faced multiple other headwinds like supply chain turmoil, war in Ukraine, China lockdowns, and fears of a severe recession.
This perfect storm of negatives drove even high-quality growth stocks with strong fundamentals down to mouth-watering valuations. Now is the time to grab these innovative disruptors while they are on sale.
Growth Stock Valuations Look Attractive Now
After the massive drawdown, growth stocks now trade at much more reasonable valuations. The chart below shows the S&P 500 growth index P/E ratio has plunged from over 35 at the start of 2022 to around 20 now.
[Chart showing S&P 500 Growth P/E ratio dropping]
Growth stocks now trade very close to their historical average P/E ratio of 19. This signals their valuations have normalized again after an extended period of trading at extremely high premiums.
According to Morningstar data, the overall U.S. stock market currently trades at an 11% discount to fair value estimates. This undervaluation combined with lower P/E ratios makes many growth names compelling buys at today’s levels.
As the Bank of England highlighted in a recent report, stretched growth stock valuations have now corrected meaningfully, lowering risk of additional downside. This sets up 2023 for a major rebound once headwinds abate.
Let’s analyze 12 of the most attractive cheap growth stocks to buy now while they remain on sale.
12 Best Cheap Growth Stocks For 2023
Here are 12 top growth stocks with low P/E ratios compared to historical levels that offer explosive upside potential:
1. Meta Platforms (META)
P/E Ratio: 14.6
Even after plummeting 60% in 2022, Meta still boasts tremendous growth drivers:
- Their social media apps Facebook, Instagram, and WhatsApp have billions of users they can monetize through ads
- Massive investments into VR and AI establish new frontiers of growth
- Developing ecommerce features and crypto/metaverse initiatives
- Rock solid balance sheet with $40B cash hoard
Meta is executing well operationally with EPS beating estimates last quarter. At just 15x earnings, META trades at the cheapest valuation since 2013 presenting a table-pounding buy.
2. Nvidia (NVDA)
P/E Ratio: 58.8
The global chip leader powers revolutionary advances in gaming, AI, self-driving cars, robotics, and the metaverse. Despite around 50% drawdown from highs, Nvidia still has tremendous growth drivers:
- Dominates the gaming graphics card market
- AI chips becoming ubiquitous across industries
- $40B acquisition of ARM supercharging growth
- Top talent and unmatched R&D capabilities
NVDA still has elevated P/E ratio reflecting its industry-leading innovation. But the valuation has compressed significantly from 90+ last year. Once macro conditions improve, Nvidia should soar.
3. PayPal (PYPL)
P/E Ratio: 29.8
PayPal operates a ubiquitous digital payments platform with over 430 million active accounts. Growth catalysts for PYPL include:
- Secular shift to digital payments and ecommerce
- Venmo enjoying tremendous user growth
- Expanding into new markets like crypto and stocks trading
- Valuable two-sided payments network
PayPal traded over 50x earnings in early 2021 before plunging 75% into extreme oversold territory. The fintech leader still has years of sustained growth ahead once macro recovers.
4. Block (SQ)
P/E Ratio: 129.9
Block’s Square digital payments platform transforms how merchants process sales. Major growth narratives persist:
- Empowering small businesses with payment solutions
- Disrupting traditional financial services
- Pioneering crypto economy through Cash App
- CEO Jack Dorsey’s relentless innovation
Like PayPal, Block boasts a powerful two-sided network and trades around 75% off highs. Long-term prospects remain bright despite recession fears crushing the stock.
5. Roku (ROKU)
P/E Ratio: 68.2
Roku is capitalizing on the cord-cutting megatrend by powering smart TV operating systems. Growth opportunities include:
- Leader in U.S. streaming platform market
- Expanding content offerings and ad platform
- International expansion just beginning
- Potential entry into smart home devices
Roku has been a 10-bagger growth stock before falling over 80%. The disruptive streaming platform should bounce back strong after economic conditions improve.
6. Teladoc Health (TDOC)
P/E Ratio: N/A
Teladoc pioneered telehealth allowing patients to virtually consult doctors. Tremendous secular growth trends boost TDOC:
- Enables convenient 24/7 healthcare access from home
- Reduces costs compared to office and ER visits
- Aging population and rise of chronic diseases
- Global telehealth market expected to exceed $560B by 2027
Teladoc is currently unprofitable due to heavy growth investments. But the company maintains a leading position in a massively underpenetrated telehealth total addressable market.
7. DocuSign (DOCU)
P/E Ratio: 54.7
Another pandemic winner, DocuSign’s e-signature software eliminates paperwork hassles. DOCU has substantial growth levers:
- Enables organizations to digitize agreements
- Saves costs and improves efficiency over paper forms
- Valuable network effect as more users join
- International expansion early innings
DocuSign crashed over 80% as the reopening tempered growth. But DOCU still dominates the e-signature space with resilient growth drivers once macro normalizes.
8. Zoom Video (ZM)
P/E Ratio: 32.5
Zoom became a household name providing invaluable video conferencing software during the pandemic. ZM still has secular tailwinds:
- Software improves workforce connectivity/productivity
- Hybrid work mandating video communication
- Steady enterprise customer growth
- International expansion opportunities
Like DocuSign, Zoom has fallen 80% from pandemic highs but retains leadership in its software niche. Long-term growth narrative remains intact once fear driven selling exhausts.
9. Sea Limited (SE)
P/E Ratio: N/A
Sea Limited operates Southeast Asia’s leading ecommerce and digital payments platforms. Growth prospects for SE include:
- Rapidly growing middle class in SE Asia
- Ecommerce penetration still low compared to China
- Early mover advantage in payments/gaming market
- Possible expansion into fintech, logistics, cloud
This formerly high-flying growth stock has plunged 80%. But SE retains first-mover advantage in a fast-growing regional economy. Valuation normalized while growth story remains strong.
10. CRISPR Therapeutics (CRSP)
P/E Ratio: 17.4
CRISPR Therapeutics pioneers revolutionary gene editing therapies like CAR-T cancer treatment. Growth drivers include:
- Gene editing can cure previously untreatable diseases
- Multiple clinical trials underway across indications
- Massive unmet need for novel disease therapies
- Platform company with broad therapeutic pipeline
Despite 50%+ drawdown, CRSP retains leadership in enormously promising gene editing space. Low valuation offers intriguing entry point before pipeline advances.
11. Cloudflare (NET)
P/E Ratio: N/A
Cloudflare operates a global cloud platform securing and accelerating millions of internet properties. Secular growth trends propelling NET:
- Mitigates cyber threats as hacking proliferates
- Enables swift, reliable internet experiences
- New product expansion like Cloudflare One
- Potential to dominate content delivery network
This former high-flyer has crashed 75% on growth stock carnage. But Cloudflare is cementing itself as an essential cloud infrastructure provider.
12. Twilio (TWLO)
P/E Ratio: N/A
Twilio provides a leading cloud communications platform enabling personalized engagement between businesses and customers. TWLO growth drivers:
- Enables text/voice communications via software APIs
- Mission critical engagement channel for enterprises
- Expanding into customer data/journey analysis
- New Flex product opening massive market
Despite falling 75% off highs, Twilio retains its platform leadership and innovative edge. The company is ramping R&D investments to tap into new opportunities.
In summary, growth stocks were decimated in 2022 as rising rates, recession fears, and geopolitical turmoil converged. However, this has driven many high-quality growth names down to bargain valuations.
The 12 best cheap growth stocks profiled above present compelling opportunities to buy future innovators and disruptors at a discount. Even in a tough macro environment, their secular growth drivers and pole position in massive addressable markets persist.
Savvy investors who scoop up these discounted growth champions could realize enormous returns over the coming years. The current undervaluation combined with normalized growth stock P/E ratios won’t last forever.
Positioning in the highest quality growth companies with fortress balance sheets and strong business models should richly reward those with patience and discipline. These fallen angels are ready to soar again once conditions improve.
Frequently Asked Questions for Best Cheap Growth Stocks
What is a good P/E ratio for a growth stock?
Growth stocks typically have higher P/E ratios than the overall market, averaging around 19-20x earnings historically. Anything above ~25x earnings is considered expensive territory for growth stocks. Good P/E ratios for growth stocks would be in the 15-25x range.
How do you identify growth stocks?
Key traits of growth stocks include a track record of accelerating revenue and earnings growth, innovative products or services, capable and visionary management, high R&D investments, and large addressable markets. Also look for competitive advantages and network effects.
Should I buy growth stocks now?
Now can be an excellent time to buy high quality growth stocks while they are trading well off their highs at lower valuations. The current bear market has created a rare chance to buy future innovation leaders at a discount before their next growth cycle.
Is it better to buy value or growth stocks today?
Both value and growth investing strategies can work well. Value stocks provide safety while growth stocks offer more upside potential. Ideal is to hold a balanced portfolio with both cheap value and out-of-favor growth names trading at reasonable valuations.
How much of my portfolio should be in growth stocks?
As a high risk/high reward category, growth stocks should generally comprise 20-40% of a well-diversified portfolio. Individual risk tolerance determines appropriate growth stock allocation. Limiting position sizes and diversifying across sectors mitigates risk.