Investors have endured painful declines in recent months. The Nasdaq and S&P 500 have approached or entered bear market territory at various points, and many prominent growth stocks have lost more than three-fourths of their value.
However, the silver lining in this situation is that many companies have entered value stock territory. Given these discounted prices, investors may want to consider Amazon (AMZN -7.16%), BJ’s Wholesale (BJ -16.28%), and Netflix (NFLX -7.02%).
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1. Amazon
Admittedly, referring to Amazon as a “top value stock to buy in May” might seem strange. Long a highflier, it spent years supporting price-to-earnings (P/E) ratios well above 100. However, a temporary slowdown in online sales growth as well as supply-chain challenges have begun to hammer Amazon stock, taking the P/E ratio down to 55.
Moreover, net sales of $116 billion for the first quarter grew by only 7% year over year. It also reported a net loss of almost $4 billion as rising operating expenses and an $8.6 billion non-operating expense weighed on revenues.
Furthermore, the company offered little hope for the immediate future as it predicted between 3% and 7% net sales growth for the second quarter. The company blames inflation, supply-chain constraints, uncertain customer demand, and other issues for this slowdown.
Nonetheless, many of these conditions are likely temporary. Grand View Research forecasts a compound annual growth rate (CAGR) for e-commerce of 15% through 2027, taking the industry to $27 trillion by that year. Such predictions bode well for the e-commerce giant.
More importantly, retail behavior has little effect on its profit growth driver, Amazon Web Services (AWS), which generated $6.5 billion in operating income in Q1. This cloud service could draw investors who have seen the stock fall by about 40% from 52-week highs. As the company works to return its retail operations to growth, the cloud segment could help instigate a recovery in Amazon stock.
2. BJ’s Wholesale
BJ’s has long served the Eastern Seaboard states as a warehouse retailer. Despite its longevity, competitors such as Costco and Walmart‘s Sam’s Club have eclipsed its performance.
However, it has revived itself from one of the most unlikely events — the pandemic. Demand for groceries caused its revenue to surge. Though growth rates have slowed since the U.S. reopened, it has held its gains and used that extra revenue to pay down debt and fund its expansion. Over the last couple of years, it has expanded into Ohio and Michigan and plans a location in Tennessee, taking it outside of its base on the East Coast.
In fiscal 2021 (which ended Jan. 29, 2022), it generated $16.7 billion in revenue, 8% more than the year before. This led to an adjusted net income of $449 million, a 4% increase over the same period. Faster increases in the cost of sales and selling, general, and administrative expenses cut into its earnings growth. Like most other retailers, frayed supply chains and rising labor costs weighed on the company.
BJ’s projects mid-single-digit revenue increases for fiscal 2022. While that represents some slowing, the stock is up more than 40% over the past year, a time when the S&P 500 was flat. And although its earnings multiple has risen to 20, that is well under Costco at 40 times earnings and Walmart at a 30 P/E ratio. This low valuation and expansion plans could help it stand out above other warehouse retailers.
3. Netflix
Netflix is another one-time growth stock now selling in value stock territory. Its current P/E ratio of 17 is well below the earnings multiples of more than 100 that it often supported after becoming profitable.
Netflix became a growth stock by pioneering the streaming media industry. Its platform led to the demise of the video rental industry as consumers could see movies at their convenience without leaving home.
Moreover, with its low cost, consumers increasingly discarded more expensive cable TV packages. Even at $15.49 per month for the standard plan, it is a small fraction of the $217 average price of a cable package, according to DecisionData.org. Furthermore, as competitors began to emerge, Netflix pivoted into proprietary content, and some of its programs have won critical and audience acclaim.
However, as content developers such as Disney and Paramount Global entered the streaming market, subscriber growth slowed and eventually turned negative. This showed up in the latest earnings report. In Q1, paid memberships fell by 200,000 from the previous quarter to 221.6 million, and the company expects net additions to fall by 2 million sequentially in Q2. That news sent the stock plummeting by 35% the day after the earnings announcement.
First-quarter revenue of $7.9 billion grew 10% versus the year-ago quarter. However, net income fell 6% to $1.6 billion over that period due to rapid increases in operating and income tax expenses.
Still, free cash flow rose to $802 million, 16% higher than 12 months ago. Moreover, analysts forecast revenue growth to remain in the high single digits through next year. At the aforementioned 17 P/E ratio, such increases could make Netflix a worthwhile value investment.
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