Volatility has finally returned to the markets this week, and while several heavily shorted stocks have been bid up to unimaginable heights like Gamestop (GME), the Nasdaq Composite (COMPQ) is having its worst week of the new year. This correction for the markets is long overdue, and the Nasdaq saw its first sell signal in several months this week, suggesting that the 13,800~ level could be a tricky spot for the bulls going forward. The good news about this sell-off is that it’s finally provided some short-term oversold conditions in a few key growth stocks and improved the valuations on several names.

While it’s certainly possible that the market could continue lower here with sentiment near multi-year highs, it’s the perfect time to build a shopping list, and there are two names whose valuations remain attractive even at current levels. Let’s take a closer look below:

(Source: TC2000.com)

Netflix (NFLX) and Bill.com (BILL) have little in common, with wildly different market caps and business models, but they do share one key trait: they are leaders in their respective industries, with robust revenue growth. Netflix recently reported its earnings and trounced estimates with revenue up 21% year-over-year, a beat of $20MM vs. the forecast of $6.62BB. Meanwhile, Bill.com, a mid-cap software company that saves time for businesses, reported a solid beat as well, with revenue of $46.2MM, up 30%~ year-over-year. These two names have got caught up in the recent market sell-off, with NFLX coming down to a very reasonable valuation at barely 42x forward earnings. Let’s take a closer look below:

Beginning with NFLX, the company reported earnings his week and noted that it had 203MM global streaming memberships as of quarter-end, a more than 20% increase from 167MM subscribers in the year-ago period. The company already had an impressive earnings growth trajectory heading into the report, but earnings estimates have been climbing at a rapid pace since.

We recently saw FY2021 estimates increase from $9.00 to $10.56, with some projecting annual EPS as high as $11.50 for FY2021. Assuming we use the more conservative estimate of $10.56, this translates to more than 70% growth year-over-year ($10.56 vs. $6.08), despite the streaming giant already lapping a year of nearly 50% growth. This incredible growth rate is being driven by improved margins, with marketing expense falling to single-digit levels and operating margins set to head above 20% if this subscriber growth continues. This is because the company’s expenses remain mostly flat, while subscription revenue is growing at over 20% per year.

(Source: YCharts.com, Author’s Chart)

As we can see from the chart below, NFLX has traded in a range of 50x to 90x earnings over the past year, with any dips below 60x earnings providing a solid buying opportunity. The chart currently shows the stock trading at 55x~ forward earnings, but estimates have yet to be updated. If we use the FY2021 annual EPS estimates of $10.56 and the current share price of $540.00, the company is actually trading at 51x estimates, which is roughly where the stock sat during the COVID-19 Crash.

It’s worth noting that operating margins were hovering at barely 10% on a trailing-twelve-month basis at the time, and they could head above 20% in FY2021. Therefore, this valuation is quite compelling at below $550.00 per share. Even if we apply a relatively conservative multiple of 60x for NFLX and assume the company only meets FY2021 forecasts of $10.56, this translates to a fair value for the stock of $633.60. So, whether the market continues to sell off or not, this looks like a decent buy-the-dip candidate.

(Source: YCharts.com)

If we look at the technical picture, it’s confirming what we see in the fundamentals, with the stock trying to break out of a base to new all-time highs. While the recent gap did not hold up, for the time being, the stock looks like it could easily make a run to $675.00+ if it can break out of its tight range it’s traded in the past six months.

(Source: YCharts.com, Author’s Chart)

The next name worth keeping an eye on is Bill.com, a company that makes accounting much easier for small and medium-sized businesses. Bill.com provides cloud-based software that automates back-office financial operations for businesses, and this helps them manage their cash inflows and outflows.

In the most recent quarter, Bill.com grew revenue to $46MM, or 31% year-over-year, and finished the period with 103,000~ customers and an impressive 121% net dollar retention rate. While the company is not profitable yet, with annual EPS set to move to positive levels in FY2023, the dominant position in the space is enviable, and its 121% retention rate suggests that customers are sticking around while the company continues to gain market share. Currently, Bill.com is trading at over 40x sales, which is quite expensive, but it’s not that unreasonable when we consider its consistent 30-40% revenue growth rates.

Assuming the company can meet estimates for over $280 million in revenue in FY2022, the price to sales ratio would dip to 30x sales, where market leaders in the software space often find a floor.

(Source: YCharts.com, Author’s Chart)

(Source: TC2000.com)

If we look at the chart above, we can see that Bill.com has pulled back to a key weekly moving average after just seeing several weeks of strong accumulation. Typically, dips to this moving average are buying opportunities, so any drop to $108.00 looks like a low-risk area to start a position in the stock. However, the key is that the stock does not put in a weekly close below $100.00, which would change this current uptrend’s character. This is because most of the past year’s pullbacks have been contained to 35% or less, so we want to see strong support for the stock if it does re-test the $109.00 area. At this level, the stock would trade at a more reasonable 40x sales and less than 30x FY2022 sales estimates.

While I would not be rushing in to buy BILL today, I would expect that any pullback below $108.00 would provide a low-risk buying opportunity. Meanwhile, NFLX looks like a strong buy below $530.00, though it could head lower to re-test its lows near $500.00 first. However, with what looks to be less than $40.00 in downside and more than $120.00 in upside to a conservative price target of $633.60, this looks like a name to keep a close eye on if we see continued market weakness. For now, I remain NFLX and may look to start a position in BILL if this market weakness continues.

Disclosure: I am long NFLX

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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NFLX shares were trading at $547.89 per share on Thursday afternoon, up $24.61 (+4.70%). Year-to-date, NFLX has gained 1.32%, versus a 1.90% rise in the benchmark S&P 500 index during the same period.

About the Author: Taylor Dart

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...

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