This has been a phenomenal year for the broader indexes. But there are still plenty of opportunities for scooping up shares of out-of-favor stocks at compelling valuations. Here's why patient investors may want to take a closer look at Adobe (ADBE -0.82%), Fluence Energy (FLNC 2.79%), and GXO Logistics (GXO) as three growth stocks that are down big but are worth buying before the new year.
Adobe has a bright future in AI, but it will take time
Daniel Foelber (Adobe): Digital media software giant Adobe has fallen 22% year to date despite a rally in the S&P 500 and an even bigger surge in the technology sector. Adobe just reported results for fiscal 2024, which saw revenue jump 10.8% to an all-time high off of an 89% gross margin. Adobe is able to achieve a high gross margin because most of its costs come from sales, general, and administrative expenses, as well as research and development.
Fiscal 2025 is shaping up to be an even better year, with accelerated sales growth and $20.20 to $20.50 in non-GAAP (adjusted) earnings per share, giving Adobe a forward price-to-earnings ratio of just 23 based on the low end of that non-GAAP guidance. So on the surface, Adobe looks like a moderate growth company at a compelling valuation.
Adobe's results and guidance aren't the issue. It's the long-term outlook for the company and doubts about whether it can monetize artificial intelligence (AI). Adobe has developed various AI-powered tools, such as text-to-image and video creation, AI-driven marketing solutions, and more. But so far, these updates haven't translated to meaningful sales growth.
There are doubts on whether Adobe can thrive in an AI-driven enterprise software world. To be fair, AI does have the potential to heavily disrupt Adobe's business model, which relies on high-volume subscriptions. Users likely won't be willing to pay up for Adobe's tools if the competition out-innovates Adobe. Or worse yet, Adobe could create such masterful upgrades that customers decide they don't need as many subscriptions, leading to negative growth.
These are risks worth considering before buying Adobe stock. However, it would be a mistake to overlook Adobe's advantages. Adobe is a highly profitable software company with a 36% operating margin. It has more cash and cash equivalents on its balance sheet than debt.
It pays a lot of stock-based compensation, which is why its non-GAAP earnings are higher than its GAAP earnings, but it has more than offset that expense with stock repurchases. Adobe's share count is down 12% over the last decade thanks to buybacks. By comparison, Adobe's enterprise software peer, Salesforce, has diluted investors and seen its share count surge 47% in the past decade.
Add it all up, and Adobe stands out as an industry-leading tech company at an excellent valuation worth buying in December and holding for years to come.
Image source: Getty Images.
A booming backlog makes Fluence Energy a powerful choice right now
Scott Levine (Fluence Energy): Reporting strong fourth-quarter 2024 financial results, Fluence Energy gave investors a lot to celebrate last month. The market, however, didn't seem too receptive, focusing instead on the energy storage company missing analysts' revenue estimates.
Shares consequently have plunged more than 25%. When expanding the perspective to the entirety of 2024, the stock's performance seems even more disconcerting, with a nearly 30% decline. But forward-looking investors would be better served to disregard the market's frustration and recognize the long-term potential for the company -- and its stock -- to flourish.
While Fluence fell short of analysts' expectations that it would book Q4 2024 sales of $1.29 billion (it reported revenue of $1.23 billion), the company exceeded estimates on the bottom line, reporting $0.34 earnings per share as opposed to analysts' estimate of $0.29. There were, however, more encouraging features in the quarter.
For one, Fluence reported about $5 million in free cash flow, which resulted in the company generating about $72 million in free cash flow for fiscal 2024 -- a stark turnaround from the negative $115 million it generated in 2023. Moreover, Fluence ended fiscal 2024 on an auspicious note with regard to its backlog. As of Sept. 30, Fluence had a backlog of about $4.5 billion, representing an increase of 55% over the $2.9 billion backlog it had at the same point in 2023.
With Fluence generating cash organically and achieving robust backlog growth in 2024, growth investors have an excellent opportunity to power their portfolios with an energy storage stock that represents less risk than it did at this time last year.
The future seems bright, too, with Fluence's substantial market opportunity. Business insight firm Mordor Intelligence forecasts the energy storage industry will grow at a compound annual growth rate of more than 14% from $51 billion in 2024 to $100 billion in 2029.
GXO's long-term prospects look excellent
Lee Samaha (GXO Logistics): Let's corral the elephant in the room first. The recent slump in GXO's share price is due to a Bloomberg report that GXO plans to remain an independent company, having previously explored options to sell the company. Now that many speculators are flushed out of the stock, it's time to look even closer at the case for buying it.
The good news is that the case before the slump was already compelling -- and is even more so now at the lower price. It's based on the argument that capital spending on e-commerce fulfillment is set to improve markedly in 2025 and beyond. GXO designs and operates warehousing/logistics operations for customers looking to outsource a non-core operation.
To understand why, you must go back to the boom in e-commerce spending caused by the COVID-19 lockdowns. It caused many companies to pull forward investments and increase existing plans. Of course, it wasn't easy to perceive that the lockdowns would not be a multi-year occurrence back then. As such, spending probably got ahead of itself, and a significant correction occurred when the lockdowns eased, exacerbated by relatively high interest rates putting the break on consumer spending.
That said, after a lull in 2022, e-commerce spending is growing at a high-single-digit rate again, and with lower interest rates seemingly on the way, it could improve. Indeed, GXO Logistics' management believes that the underlying demand for e-commerce capacity "is accelerating."
Consequently, management targets annual revenue growth of 10% and annual adjusted EPS growth of 15% from 2024 to 2027. Trading on less than 18 times expected 2024 earnings, and with strong growth prospects, GXO is an excellent value for a growth stock.