Buying shares on a dip in price is sometimes seen as a good strategy, especially when it comes to a blue-chip stock that’s likely to recover. After all, if it’s a sound business and it’s cheaper to buy, it should make for a solid investment to hang on to in your portfolio. But in the world of meme stocks and high-risk investments, many stocks today are down by much more than just 10%, 20%, or even 50%.
A couple of once-promising growth stocks that are down 80% or more from their highs are Aurora Cannabis (NASDAQ: ACB) and Upstart Holdings (NASDAQ: UPST). Are these stocks destined to fall lower, or should you buy them at their significantly reduced valuations?
1. Aurora Cannabis
Canadian-based pot producer Aurora Cannabis was once one of the top cannabis stocks to invest in, going head-to-head with rival Canopy Growth for the top spot in the industry. Today, however, it’s struggling to generate any consistent growth, and it remains unprofitable. Trading at around $1.50, the stock is down a whopping 82% from its 52-week high of $8.69 that it hit last November.
The reason for the stock’s abysmal performance can be summarized through just two charts:
© YCharts ACB Revenue (Quarterly YoY Growth)
Investors are likely unconvinced at this point with bullish arguments that Aurora is working on cost-savings initiatives aimed to bring down expenses — as well as working toward adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profitability.
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Those aren’t new strategies for the company, but that’s what the carrot remains today for long-term investors. Whether Aurora posts an adjusted profit may be moot anyway, since this is, after all, primarily a growth stock, and the one thing it needs to deliver on is growth.
For those reasons, I would remain skeptical about Aurora. The only scenario where I would expect to see Aurora’s share price increase over the next year would be due to a reverse stock split (which doesn’t unfortunately result in any profits for investors). And that may not be that far away, given how closely the stock is to the $1 mark — it needs to stay above that to remain on the Nasdaq.
Despite its significant decline in value, Aurora isn’t a stock worth taking a chance on today.
2. Upstart Holdings
An even more beaten-down stock than Aurora is Upstart Holdings. The lending company, which uses artificial intelligence to help it make more intelligent decisions on potential borrowers, has been in a steep decline for multiple reasons.
For one, its top and bottom lines have been struggling. And a weakening economy could further dampen these numbers.
© YCharts UPST Revenue (Quarterly YoY Growth)
But there’s also another reason a crash looked to be inevitable for the fintech stock; its valuation was out of control. Last year, there were times the stock was trading at more than 400 times its earnings. Today, it’s down to a more modest price-to-earnings multiple of 31. That’s much more of a tenable valuation for investors — and why the stock could make for an attractive buy.
Upstart stock is currently trading at less than $28, which is 93% lower than its 52-week high of $401.49. But while it may seem like a cheap buy on the dip, investors should be careful not to ignore the red flags that the stock possesses. Unless you’re willing to take on the risk of a slowing economy and rising interest rates, and the effect that may have on the lending business, you’re better off steering clear of Upstart.
For long-term investors who can remain patient, however, the current valuation could make it a worthwhile buy.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Upstart Holdings, Inc. The Motley Fool has a disclosure policy.
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