U.S. Markets closed

4 Growth Stocks to Buy Instead of iQiyi

Bret Kenwell

iQiyi (NASDAQ:IQ) has been called “the Netflix (NASDAQ:NFLX) of China.” The catchy description catapulted IQ’s share price as NFLX stock was soaring earlier this year. However, investors have gotten a full taste of what volatility feels like, as iQiyi stock has struggled while Netflix shares have tumbled and Chinese stocks have been weak. That may leave investors wondering, “what are some other growth stocks to buy?”

With that said, here are four stocks to buy. Let’s start with a company we just received a quarterly update from.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Growth Stocks to Buy Instead of iQiyi: Nvidia (NVDA)

Growth Stocks to Buy Instead of iQiyi: Nvidia (NVDA)

Nvidia (NASDAQ:NVDA) initially sold off after reporting earnings. However, the stock has been on fire since. After rallying back to its highs, shares broke out and are now trading north of $280. That delayed rally is likely a result of investors picking through the earnings report and realizing that it was pretty darn good.

Automotive revenues jumped 13% to a quarterly record of $161 million. Gaming and datacenter both saw robust growth and nearly every facet of the business is on fire. The one area not doing well? Crypto. The company expected $100 million in crypto-related sales for the quarter. The total? Just $18 million and management isn’t factoring in any expectations from this source going forward.

Is that what hit Nvidia or was the knee-jerk earnings reaction to sell the stock? I’m not sure. But this company is perhaps the best positioned to take advantage of the budding emergence of artificial intelligence in multiple industries. It’s already riding secular growth waves and while some will argue that shares trade at 12 times sales on a trailing basis, its earnings valuation is much more reasonable thanks to its strong margins.

That’s not unlike Visa (NYSE:V), Facebook (NASDAQ:FB) or a number of other companies with high sales multiples but reasonable earnings multiples. And honestly, crypto isn’t a huge part of the Nvidia business. It’s good to see Wall Street realize that too.

Growth Stocks to Buy Instead of iQiyi: Alphabet (GOOG, GOOGL)

Growth Stocks to Buy Instead of iQiyi: Alphabet (GOOG, GOOGL)

Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has now received three valuation estimates in excess of $100 billion for its self-driving car segment Waymo. Morgan Stanley’s estimate of $175 billion trails only RBC, which assigned a bull-case enterprise value of $183 billion earlier this year.

Why does this matter? Because even though GOOGL’s core business continues to do quite well, the company needs another revenue channel as it nears a $1 trillion market cap.

Further, keep in mind that just last fall, the estimates for Waymo were only in the $70 billion to $80 billion range. In other words, we’re already seeing more than a doubling in those valuations. With Waymo in the early days of autonomous driving solutions, it could be a huge business down the road.

Aside from that though, GOOGL’s growth profile looks pretty solid. Analysts expect revenue to grow 24% this year and 19.5% next year. On the earnings front, they’re modeling for 23% and 21% growth in 2018 and 2019, respectively. On current estimates, GOOGL stock trades at about 30 times earnings.

Growth Stocks to Buy Instead of iQiyi: PayPal (PYPL)

Growth Stocks to Buy Instead of iQiyi: PayPal (PYPL)

We couldn’t understand why PayPal (NASDAQ:PYPL) stock came under pressure when it last reported earnings. The company beat on earnings and revenue expectations, while raising guidance for next quarter and the full-year. Still, it received no love from investors after the report.

The company also announced a larger buyback and cleared up the only possible issue in the report, which was with its free-cash flow. (By the way, FCF was strong but looked negative thanks to an accounting change).

Maybe the selloff was a result of a sell-the-news event, as shares rallied from $80-to-$92-per-share before earnings. Still, the selloff seemed like overkill. As you can see in the link above, we’re not surprised by the big rebound in PYPL. The question is now whether PYPL stock can make new highs or if those levels will act as resistance.

Like Alphabet, PYPL too has future growth prospects even as its core business continues to churn out healthy growth. With its robust and fast-growing Venmo unit, PayPal can tap this platform for more growth when it needs it.

The time is not now though, as PayPal should grow sales 18% this year and 16% next year. On the earnings front, analysts expect 23% growth this year and 21% in 2019.

Growth Stocks to Buy Instead of iQiyi: Salesforce (CRM)

Growth Stocks to Buy Instead of iQiyi: Salesforce (CRM)

I have been a big supporter of the idea that the cloud is far from hitting late-cycle growth. As a result, companies like Microsoft (NASDAQ:MSFT), Adobe (NASDAQ:ADBE) and Salesforce (NASDAQ:CRM) have enjoyed strong growth.

Unlike ADBE and MSFT, Salesforce has a much more unattractive valuation. But you know what else had an unattractive valuation? Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) were two of them. Along with CRM, the three of them have been some of the best-performing stocks since the Great Recession.

In other words, valuation has not been a negative catalyst for CRM.

Salesforce is spending plenty to keep growing its revenue base. That’s important, because it makes its earnings-based valuation seem really high. In reality, the company sees above-20% sales growth continuing for at least several more years and its sales-based valuation is more attractive than many of its peers.

CRM is focusing on growing its customer base, filling its order book with sticky, subscription-based software-as-a-service offerings. This will eventually pave the way to having dependable and consistent earnings and cash flow, two metrics that have been rising over the past few years. This year alone, analysts expect 84% earnings growth.

Too many investors glance at the valuation and say “no way!” I too flinch at CRM’s valuation some times. But the cloud is here to stay and it’s all about growing that customer base. When the spending cycle slows down, earnings and margins will explode. That’s why so many continue to stay long the stock.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he did not hold a position in any of the aforementioned securities.

Compare Brokers

The post 4 Growth Stocks to Buy Instead of iQiyi appeared first on InvestorPlace.