Much of the last year was dominated by a global pandemic, so coming out of 2021 investors could not have predicted the challenges ahead. Now, just 12 months later, supply chain bottlenecks have helped fuel 40-year high inflation, the highest interest rates in nearly 15 years and the worst market bearish for more than a decade. Hush.
Due to the economic overhang, many former high-flying stocks have fallen on hard times. Yet, for those who see the glass half full, investors have the rare opportunity to buy these high quality companies at discounted prices.
When opportunities abound, it can be difficult to separate the wheat from the chaff. To make it easier, let’s narrow the scope and look at three companies that have all the hallmarks of a ready-to-run stock: industry-leading position, significant secular tailwinds, and a large addressable market.
1. Shopify: The death of e-commerce has been greatly exaggerated
After its public debut in mid-2015, Shopify (STORE -0.78%) quickly established itself as the leading provider of software-as-a-service (SaaS) tools to facilitate digital retail for merchants.
However, after several years of rampant growth and lockdown-fueled gains, the e-commerce platform has seen a reversal of fortune. Tough competitions, slowing online spending and persistent inflation have led to growth that has slowed to a blistering pace. Investors would be forgiven for thinking Shopify’s best days might be behind them.
Yet even though the growth of e-commerce seems dead on the vine, there are still plenty of green shoots that suggest life is about to burst. Shopify reported record sales over the Black Friday/Cyber Monday weekend, which were up 19% year-over-year and 21% in constant currency. Amazon also reported record sales, saying it was the “biggest holiday shopping weekend in company history”. With the world’s largest digital retail platforms seeing record sales, e-commerce is unlikely to have met an untimely demise.
There is more. E-commerce growth may have stalled temporarily, but the underlying secular tailwinds are accelerating. According Morgan Stanley.
Additionally, Shopify estimates its total addressable market at $160 billion. Against the backdrop of its $4.6 billion in revenue in 2021, the untapped opportunity is clear.
2. Nvidia: The game is down, but not over
Nvidia (NVDA -1.51%) is best known for graphics processing units (GPUs) that bring digital images to life in games, but recently gamers have been delaying upgrading to the latest chips until macroeconomic conditions improve. As a result, in Nvidia’s third quarter of fiscal 2023 (ended Oct. 30), revenue was up just 3% year-over-year, driven by a 33% drop in chip sales. of game.
But it’s not just Nvidia feeling the pain. PC and laptop shipments fell nearly 20% year over year in the third quarter, the biggest market decline in more than two decades according to Gartner. But even amid the economic upheaval, Nvidia has increased its lead, with a dominating 88% share of the discrete desktop GPU market, up from 80% in the second quarter.
And gaming is just the tip of the iceberg for the semiconductor specialist. Nvidia is also a leading provider of processors used by data centers and cloud computing to accelerate travel through the ether, and is the first choice of each of the world’s major cloud operators. As a result, data center revenue grew 31% year-over-year in the third quarter.
This is just the beginning. Nvidia generated record revenue of $26.9 billion last year, which is a drop in the ocean compared to its huge opportunity. Management estimates its addressable market to be a whopping $1 trillion, which helps illustrate the significant lead ahead.
3. The Trade Desk: the flagship of digital advertising
In programmatic advertising, no one holds the candle to The trading post (TTD 4.97%). The company’s industry-leading adtech platform automates digital ad buying in real time, helping marketers get more bang for their buck.
The Trade Desk is a pioneer in the field and continues to disrupt the status quo. The company has built a broad coalition of the world’s biggest advertisers, all of whom have flocked to its Unified ID 2.0 – the heir apparent to ad tracking cookies, which quickly follow the path of the dinosaur. The Trade Desk also introduced OpenPath, which cuts out the middleman and provides direct access to premium ad inventory for those using its platform.
To fully appreciate its position in the industry, let’s compare The Trade Desk’s recent results to its two biggest rivals. In the third quarter, the mainstay of digital advertising Alphabet increased revenue by just 6% year-over-year, while Metaplatforms turnover fell by 4%. By contrast, The Trade Desk’s revenue jumped 31%, helping to illustrate its clear advantage.
Although estimates vary, global digital ad spending is expected to grow from $521 billion in 2021 to over $876 billion by 2026, a compound annual growth rate (CAGR) of around 11%, according to Oberlo. . The Trade Desk’s much higher growth rate shows that it is stealing market share from its rivals, which bodes well.
The Trade Desk generated $1.12 billion in revenue in 2021, which pales in comparison to its still untapped opportunity. The global advertising industry hit $772 billion in 2021, but is expected to exceed $1 trillion by 2026, giving The Trade Desk plenty of fertile fields to plow.
A word on valuation
It is important to note that all this potential comes at a price. Even though valuations have fallen significantly over the past year, none of these companies are cheap by traditional measures. The Trade Desk, Nvidia, and Shopify are selling at 14, 14, and 8 times next year’s sales, respectively, while a reasonable price-to-sales ratio is usually between 1 and 2. However, given the combination of strong historical performance and significant future opportunity, it is no surprise that investors attribute these stocks to a higher valuation.
Those who have the patience to let the recovery play out will be amply rewarded when the economy picks up again, propelling these stocks skyward.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Danny Vena holds positions at Alphabet, Amazon.com, Meta Platforms, Nvidia, Shopify, and Trade Desk and has the following options: January 2023 Long Calls at $114 on Shopify and January 2023 Long Calls at $116 on Shopify. The Motley Fool maintains and recommends Alphabet, Amazon.com, Meta Platforms, Nvidia, Shopify and Trade Desk. The Motley Fool recommends Gartner and recommends the following options: $1,140 January 2023 Long Call on Shopify and $1,160 January 2023 Short Call on Shopify. The Motley Fool has a disclosure policy.
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