There are usually reasons to explain drops in growth stocks. Investors often have a laundry list of reasons they've lost faith in an up-and-coming business, and it's common for these reasons to be strongly grounded in reality.
That said, investors are also prone to overreacting by not thinking about the long term, putting quality growth stocks such as Kura Sushi(NASDAQ: KRUS), Xometry(NASDAQ: XMTR), and Celsius Holdings(NASDAQ: CELH) on sale. These stocks are down between 35% and 65% from their respective 52-week highs, as of this writing.
There are legitimate reasons for the drops. But there's still reason to believe the long term will be bright for this trio, as I'll explain.
1. Kura Sushi: Down 35%
Kura Sushi is a very small restaurant chain in the U.S., with only 64 locations as of the end of its fiscal third quarter of 2024. Small restaurant chains have an intrinsic struggle: Adverse conditions at just a few locations can have an outsized effect on overall financial results.
Over one-quarter of Kura Sushi's locations are in California. With the minimum wage laws in the Golden State, it's getting harder to profitably operate a restaurant there. Through the first three quarters of the fiscal year, the company has a net loss of $3.6 million, compared to a net loss of only $1.4 million in the same period of its fiscal 2023.
However, if there's a small restaurant chain that can scale profitably, I believe Kura Sushi is the one. The company embraces technology at its locations, such as conveyor belts, automatic dishwashers, and robot drink servers. These things can cut down on labor expenses. It's a big reason that the chain achieved a strong Q3 restaurant-level operating margin of 20%.
Kura Sushi's management believes it can have 290 locations in the long term, more than four times as many as it has now. With its efficient operations that have the potential to scale profitably, I believe this stock could have significant upside in coming years, making now a great time to buy.
2. Xometry: Down 51%
Kura Sushi is an obscure company, but Xometry might be even more obscure. This is a marketplace for connecting buyers with small-scale manufacturers for custom 3D printing, machining, and more. It's not covered by many analysts, which leaves investors to figure things out on their own -- and it's hard to figure out how big this market is and how defensible Xometry's business is.
Xometry's management is obviously optimistic. But investors are questioning the company's prospects due to drastically slowing growth. Management only guided for 14% to 16% revenue growth in the upcoming Q3. For perspective, its revenue was up 22% in 2023 and up 18% in the first half of 2024.
This is especially troubling because Xometry used to sell certain supplies to its base of active buyers. It stopped this in the second quarter of 2023, which negatively affected revenue. But the comparison headwind ended in the second quarter of 2024. The company's Q3 guidance for slow growth looks even slower with this context.
Predicting industry trends will be hard here, which is why I choose to focus on key Xometry metrics that help clarify its health. For example, the company had nearly 62,000 active buyers in Q2, which was up a really strong 27%. Moreover, customers spending $50,000 or more annually jumped by 24%. Its Q3 gross margin improved to 33.5%, compared with 31.7% in the prior-year period.
There are enough positive trends in key metrics to give me optimism about Xometry's business in the long term. After it dropped more than 50% from its 52-week highs, I think today is a compelling entry point.
3. Celsius: Down 65%
Take Celsius stock with a grain of salt: It's up 2,500% over the last five years, even though it's down 65% from its 52-week highs. So it is technically down -- but its gains in recent years are mind-boggling.
I'll try to succinctly summarize the current problem for Celsius: The brand experienced such monumental growth in recent years that it was almost impossible to predict demand. Over the last year or so, demand was overestimated, and now its revenue is slowing because it's reducing on-hand inventory.
Revenue for Celsius in the upcoming Q3 could be ugly as it simply sells through inventory it has. Investors don't like that. But the company could very likely still achieve a double-digit growth rate for the year. For perspective, revenue in the first half of 2024 was up 29% from the first half of 2023. The company's also still taking market share away from its competitors, which is a healthy trend for the long-term viability of this business.
Furthermore, Celsius is debt-free, it has plenty of cash, and its profits are skyrocketing with scale. In Q2 2024, the company's operating income of $94 million was way ahead of its operating income of $65 million in the prior-year period.
Given its strong growth, profitability, and strong balance sheet, I'd say that Celsius stock is a better buy right now compared to Kura Sushi stock and Xometry stock. The latter two are a tad more speculative than Celsius in comparison. But for investors looking for growth stocks that are down and worthy of buying, I believe all three are good ideas today.
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Jon Quast has positions in Celsius, Kura Sushi Usa, and Xometry. The Motley Fool has positions in and recommends Celsius. The Motley Fool has a disclosure policy.
