2 Growth Stocks Down 45% and 73% to Buy on the Dip, According to Wall Street

The S&P 500 (^GSPC 0.28%) climbed 14% through June, its fifth-best first half in the last quarter century. Four stocks — Nvidia, Microsoft, Alphabet, and Amazon — contributed more than half of those gains, while many others lagged the market. But Wall Street sees buying opportunities among the underperformers.

For instance, shares of Zscaler (ZS 1.27%) and Paycom Software (PAYC 5.17%) are down 9% and 28%, respectively, year to date. They have also tumbled 45% and 73%, respectively, from their record highs.

However, Zscaler has a median price target of $224 per share, which implies 11% upside from its current price of $202 per share. And Paycom has a median price target of $172 per share, which implies 16% upside from its current price of $148 per share.

Here’s what investors should know.

1. Zscaler

Zscaler specializes in zero trust network access. Its platform, called a security service edge (SSE), modernizes corporate networks by offloading traffic inspection and policy enforcement, such that those processes occur in the cloud rather than private data centers. That lets users quickly and securely access internal applications, external cloud services, and the open internet, without the complexity of on-premises networking appliances.

Zscaler has a strong market presence. In 2023, the International Data Corp. (IDC) recognized it as the best network edge security as a service solution, and Forrester Research recognized its leadership in SaaS security posture management. In 2024, Forrester and Gartner recognized Zscaler as a leader in the SSE market alongside Netskope and Palo Alto Networks.

Zscaler reported encouraging financial results in the third quarter of fiscal 2024 (ended April 2024), beating expectations on the top and bottom lines. Revenue rose 32% to $553 million and non-GAAP net income increased 83% to $0.88 per diluted share. CEO Jagtar Chaudhry noted the emerging products like cloud workload protection, data protection, and digital experience monitoring contributed about 25% of new and upsell business in the quarter.

Looking ahead, Zscaler values its addressable market at $96 billion, and Wall Street expects the company to grow adjusted earnings per share at 18% annually through fiscal 2027 (ends July 2027). In that context, its current valuation of 68 times adjusted earnings look rather expensive.

Zscaler certainly has tailwinds at its back. Cybersecurity consistently ranks among the most important IT budget priorities, and the company is expanding its addressable market with new products. But not every beaten-down stock is a bargain. Investors can buy a very small position in Zscaler today, provided they are comfortable with volatility and willing to add to their position in the event of a drawdown.

2. Paycom Software

Paycom specializes in human capital management (HCM) software. Its platform integrates tools for payroll, recruitment, scheduling, and human resources (HR) management. That sets the company apart. Most organizations rely on multiple HCM vendors, an inefficient strategy that involves duplicating data, but Paycom eliminates redundant work because its software is built on a single database.

Paycom creates additional value for clients through workflow automation. For instance, its payroll software, Beti (Better Employee Transaction Interface), automates payroll by requiring employees to review and approve their paychecks prior to processing. Similarly, its time and labor management product includes a feature called Gone that automates decisioning about time-off requests.

Paycom reported decent financial results in the first quarter. Revenue rose 11% to $500 million and non-GAAP net income increased 5% to $2.59 per diluted. Bottom-line growth was muted due to investments in product innovation, but those investments expand its addressable market. In April 2023, Paycom launched its Global HCM product, bringing its platform (excluding payroll) to international markets. Since then, Beti has debuted in Canada, Ireland, Mexico, and the United Kingdom.

On the latest earnings call, CEO Chad Richison told analysts that Paycom has made “meaningful progress on the international front.” However, he also said the company has captured just 5% of its addressable market in the U.S., meaning it holds far less than 5% market share worldwide. That leaves a long runway for growth.

With that in mind, Wall Street expects adjusted earnings per share to increase at 11% annually through 2026. That consensus estimate makes its current valuation of 18 times adjusted earnings look reasonable. Indeed, Paycom trades near its cheapest price-to-earnings ratio in history. Patient investors should consider buying a position in this growth stock today.