3 Top Tech Stocks That Are Down More Than Bitcoin and Ethereum

Cryptocurrency has a reputation for both explosive growth and cripplingly dangerous volatility. In many ways, the U.S. stock market sell-off has been much more volatile. The Nasdaq’s decline isn’t representative of the drawdowns we’ve seen in individual large-cap and small-cap stocks. As an example, PayPal Holdings ( PYPL -0.17% ), Shopify ( SHOP ), and Meta Platforms ( FB -0.81% ) are all down more from their 52-week highs than Bitcoin ( BTC -4.04% ) or Ethereum ( ETH -5.28% ). Here’s the case for buying each tech stock now, as well as how volatility could impact your investments going forward.

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A play on the war on cash

In just seven months, the share prices of PayPal have been cut by two-thirds, which has dropped PayPal from the fifth-largest U.S.-based financial services company by market cap to not even cracking the top 10. PayPal stock’s ultra dip makes it look more like altcoins such as Solana or Cardano than Bitcoin and Ethereum, let alone a typical large-cap industry-leading business.

PayPal is transitioning from a young and fast-growing company to a mature and established company with moderate or even low growth. That step change has investors confused about how to price PayPal stock.

Although PayPal’s growth is slowing, it is posting consistent earnings and free cash flow (FCF) — two core fundamentals that make a company worth owning over the long term. In 2016, PayPal earned $10.8 billion in revenue, $1.4 billion in net income, and $2.5 billion in FCF. In 2021, five years later, it more than doubled revenue to $25.4 billion, tripled net income to $4.2 billion, and more than doubled FCF to $5.4 billion. That’s a great-looking run. The concern is that when we focus on 2021 compared to 2020, it’s an ugly chart.

PYPL Revenue (Annual) Chart

PYPL Revenue (Annual) data by YCharts

Prior to its Q4 2021 post-earnings sell-off, PayPal stock fetched a premium valuation because it was seen as a company that could grow its revenue by 20% or more per year while also growing net income and free cash flow. However, PayPal failed to do that in 2021, with revenue growing less than 20%, net income being down, and free cash flow growing less than 10%.

To make matters worse, PayPal forecasts a slowdown in new account growth and revenue growth of just 15% to 17% in 2022. For this reason, it’s unsurprising that the market needs time to value PayPal as a slower-growing company.

From extremely expensive to plain expensive

Shopify posted what was, by most accounts, an impressive quarter and a record-smashing year. But in hindsight, it’s clear to see the company’s stock price got ahead of itself. Shopify was a classic example of a phenomenal business with an overvalued stock.

Investing, at its core, is all about buying a company for a price that is justifiable based on its future earnings growth. It isn’t Shopify’s fault that people kept bidding its stock price up to a level that was almost unsupportable from a growth standpoint. Until the recent sell-off, there were much more attractive buys in e-commerce, like United Parcel Service, for example. That is, until the share prices of Shopify collapsed by 63% in just three months.

Shopify is still an expensive stock, trading at a forward price-to-sales (P/S) ratio of 13 and a forward price-to-earnings (P/E) ratio of about 175. But it’s a lot cheaper than it used to be. Shopify estimates that it powers 10% of the U.S. e-commerce market in terms of transaction volume. If Shopify continues to increase its share of the e-commerce market while the market overall also grows larger, than Shopify could grow into its valuation over time. For that reason, risk-tolerant investors could consider opening a starter position in Shopify now.

The metaverse is a high-risk, high-reward gamble

Meta Platforms, formerly known as Facebook, shaved more than the combined current value of PayPal and Shopify off its market cap in a matter of months. What was once a company worth over $1 trillion is now worth $550 billion.

As evident by the name change, Meta Platforms is undergoing a makeover as the company invests billions in virtual reality, alternative reality, and other avenues to make sure it can succeed in an increasingly virtual world. Meta Platforms is threatened by Web3, which is the idea of transferring ownership of information and the internet away from sovereign nations and corporations into the hands of individuals. It’s an empowering proposal, but it’s also terrible for Meta’s business, which depends on data and ads.

A decentralized internet could mean that companies like Facebook have less control over information, information that is vital for identifying demographics and behaviors that advertisers look for. By investing in the commercialization of the metaverse, Meta Platforms is essentially hedging its business so that it can thrive in the internet age..

A key driver pushing Meta Platforms’ stock lower is slowing growth. Meta is guiding for just 3% to 11% revenue growth in the first quarter of 2022 compared to Q1 2021. Another major factor driving the stock lower is the concern over prolonged losses incurred by investments in the metaverse, as represented by Meta Platforms’ Reality Labs (which it previously didn’t disclose on its income statement).

For 2021, Reality Labs posted an operating loss of $10.2 billion, and Meta told investors that research and development spending would only increase from here. For investors that aren’t interested in the metaverse, this kind of strategic plan is probably not something they want to be a part of. But for those who believe in Mark Zuckerberg and the metaverse, now could be one of the best times to start loading up on Meta Platforms’ stock — and the company has a forward P/E ratio of around 16, which is the lowest it has had in years.

Volatility is here to stay

Even if you’re uninterested in PayPal, Shopify, or Meta Platforms, the harsh reality that all three stocks have been as volatile as major cryptocurrencies illustrates that markets can be irrational in the short term. In today’s information age, news spreads like wildfire around the globe in seconds. Retail investors have access to tools once reserved for experts.

As we saw in December 2018 and March 2020, and as we are seeing now, market corrections are happening faster than ever before. It may be best to accept that volatility, even in large established companies, is simply the price of admission for being a long-term investor.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a Motley Fool premium advisory service. Were motley! Questioning an investing thesis even one of our own helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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