2 Beaten-Down Stocks to Buy Before They Bounce Back

Shopify (NASDAQ:SHOP) and Intuitive Surgical (NASDAQ:ISRG) were considered market darlings for a long time, but in recent years, they have faced significant headwinds that have threatened their status. Both stocks have dropped substantially this year. Shopify is down 19% while Intuitive Surgical has declined 29%. However, there are reasons to remain bullish on both stocks and to buy the dip before they rebound. Let me explain.

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1. Shopify

Shopify's second-quarter results were excellent. The company's revenue came in at $3.6 billion, 34% higher than the year-ago period. The company's operating income of $488 million jumped almost 68% year over year, while its non-GAAP net income of $439 million, which excludes the impact of equity investments, grew 30% year over year. Shopify's third-quarter guidance came in ahead of analyst estimates, too.

The stock jumped after its latest quarterly update, but it remains down by 9% over the last 12 months. What's going on? Some investors remain worried that artificial intelligence (AI) will eventually replace some of Shopify's services. Further, the company trades at 53.2x forward earnings, which seems a bit too steep for a company with somewhat uncertain prospects, given how quickly AI continues to develop.

But is Shopify really in danger of losing out to AI? In my view, the evidence suggests otherwise. The e-commerce specialist has launched various AI-powered initiatives that are helping boost the productivity of merchants on its platforms. Thanks to AI, Shopify's clients can build storefronts much more easily, write up product descriptions more quickly, better analyze data, make products easier to find through AI-powered searches, and much more.

These initiatives are working, as management noted, and Shopify won't stop there. The company will continue integrating AI across its platform to help merchants and their customers. The company's services are unlikely to be completely replaced by the technology, in my view. AI could, instead, be a net benefit to the business. Meanwhile, the shift toward e-commerce continues unabated, and Shopify remains a leader in the industry, with a strong competitive advantage stemming from switching costs. All these factors make the stock an attractive pick on the dip.

2. Intuitive Surgical

Intuitive Surgical is a leader in the robotic-assisted surgery (RAS) market, offering the da Vinci system, one of the industry's leading devices. However, the company is facing increased competition, notably from Medtronic (NYSE:MDT), which earned U.S. clearance for its Hugo RAS system for urologic procedures in December of last year. Further, Intuitive Surgical's shares are hardly cheap.

The company is trading at 32.6x forward earnings. Can Intuitive Surgical bounce back? Yes, it can, and here's why. The company has a solid market lead, and that's unlikely to change even with mounting competition. The da Vinci system has been around for more than 25 years and has a large installed base of 11,710 devices as of the end of the second quarter. So, it has achieved widespread adoption and accumulated extensive real-world use.

This large installed base also helps Intuitive Surgical improve its devices by enabling it to receive feedback from surgeons. The company's latest version of the da Vinci system boasts several new features, including Force Feedback Technology, which allows physicians to better feel the pressure they are applying to patients' tissues during procedures.

So, Intuitive Surgical has a first-mover advantage and a data flywheel: a larger installed base provides more data to analyze and improve its da Vinci system, which then attracts more surgeons and generates more data. But it's also worth noting that Intuitive Surgical benefits from high switching costs, given that its devices carry high upfront costs for hospitals, not to mention the time it takes to train surgeons to use them.

Meanwhile, Intuitive Surgical is still looking at a large addressable opportunity in the underpenetrated RAS market, which, by the way, will only expand over the long run as the world's population ages. Given all that, Intuitive Surgical's prospects still appear attractive, and the company's shares are worth buying at current levels.

Prosper Junior Bakiny has positions in Intuitive Surgical and Shopify. The Motley Fool has positions in and recommends Intuitive Surgical, Medtronic, and Shopify. The Motley Fool recommends the following options: long January 2028 $520 calls on Intuitive Surgical and short January 2028 $530 calls on Intuitive Surgical. The Motley Fool has a disclosure policy.