Most of the past year was dominated by a global pandemic, so that from 2021, investors could not predict what was ahead. Now, just 12 months later, supply chain woes have contributed to 40-year high inflation, the highest interest rates in 15 years, and the worst stock market in decades. Sheesh.
Due to the economic upturn, many former top stocks have fallen on hard times. However, for those who see the glass as half full, investors are presented with a rare opportunity to buy these quality companies at discounted prices.
When opportunities abound, it can be difficult to separate the wheat from the chaff. To make things easier, let’s narrow the field and look at three businesses that have all the signs of a stock ready to work: an industry-leading position, significant secular tails, and a large addressable market.
1. Shopify: The death of e-commerce has been overstated
After its public launch in mid-2015, Shopify (SHOP -0.78%) has quickly emerged as a leading provider of software-as-a-service (SaaS) tools to facilitate digital marketing for merchants.
After years of unlimited growth and blockbuster acquisitions, however, the e-commerce platform has experienced a reversal of fortune. Difficult collections, slowing online spending, and persistent inflation have led to slower growth. Investors would be forgiven for thinking that Shopify’s best days may be behind it.
Yet even though e-commerce growth appears to be dead on the vine, there are still plenty of green shoots that suggest life is about to explode. Shopify reported record-breaking sales over the Black Friday/Cyber Monday weekend, growing 19% year over year and 21% in constant currency. Amazon also reported record-breaking sales, saying it was the company’s “biggest holiday shopping weekend ever.” With the world’s largest digital marketing platforms reporting record sales, it’s unlikely that e-commerce has experienced an untimely collapse.
There is more. E-commerce growth may have stalled temporarily, but fundamental secular tailwinds are accelerating. The global e-commerce market is expected to exceed $3.3 trillion in 2022, reaching $5.4 trillion in 2026, according to Morgan Stanley.
Additionally, Shopify estimates its total addressable market at $160 billion. When looking at its projected revenue of $4.6 billion by 2021, the opportunity is clear.
2. Nvidia: The game is downloaded but does not launch
Nvidia (NVDA -1.51%) is best known for the graphics processing units (GPUs) that bring digital images to life in games, but recently gamers have delayed upgrading to the latest chips until macroeconomic conditions improve. As a result, in the third quarter of Nvidia’s fiscal year 2023 (ended October 30), revenue increased only 3% year over year, with a 33% decrease in sales of gaming chips.
But it’s not just Nvidia feeling the pain. Shipments of PCs and laptops fell 20% year-on-year in the third quarter, the market’s biggest drop in two decades. Gartner. But even amid the economic upheaval, Nvidia increased its lead, with a commanding 88% share of the discrete desktop GPU market, up from 80% in the second quarter.
And the game is only the tip of the iceberg for the semiconductor specialist. Nvidia is also one of the leading providers of processors used by data centers and cloud computing to accelerate movement around the ether, and is the top choice of each of the world’s leading cloud operators. As a result, data center revenue grew 31% year over year in the third quarter.
It’s 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 believes its market cap is $1 trillion, which helps highlight the significant path ahead.
3. Marketing Platform: Flagship for digital advertising
In terms of programmatic advertising, no one holds a candle to it Trading Desk (TTD Legal interest rate 4.97%). The company’s state-of-the-art adtech platform automates digital ad buying in real time, helping buyers get more bang for their buck.
The Trading Desk is a leader in the field and continues to challenge the status quo. The company has formed a broad coalition of the world’s largest advertisers, all of which have embraced Unified ID 2.0 — the apparent legacy of ad-tracking cookies, which are quickly going the way of the dinosaur. The Trade Desk also introduced OpenPath, which eliminates the middleman and provides direct access to premium ad inventory for those using its platform.
To fully assess its position in the industry, let’s compare The Trade Desk’s latest results with its two biggest rivals. In the third quarter, the king of digital advertising Alphabet Revenue was up just 6% year over year, however Meta Platforms Revenue decreased by 4%. In contrast, revenue for The Trade Desk rose 31 percent, helping to highlight its clear profitability.
While estimates vary, global digital ad spending is expected to grow from $521 billion in 2021 to more than $876 billion by 2026, a compound annual growth rate (CAGR) of about 11%, according to Oberlo . Trading Desk’s very high growth rate indicates that it is stealing market share from its competitors, which bodes well.
The Trading Desk is projected to generate $1.12 billion in revenue in 2021, which pales in comparison to its untapped opportunity. The global advertising industry reached $772 billion in 2021, but is expected to reach $1 trillion by 2026, providing plenty of fertile ground for The Trade Desk.
A word about evaluation
It’s important to note that all of this potential comes at a price. Even though prices have dropped significantly over the past year, none of these companies are cheap using traditional metrics. Commerce Desktop, Nvidia, and Shopify trade at 14, 14, and 8 times next year’s sales, respectively, while a reasonable price-to-sales ratio is typically between 1 and 2. However, given the combination of strong historical performance and significant future opportunity, it’s not surprising that investors would value these stocks at a premium.
Those who are patient enough to let the recovery happen will be greatly rewarded once the economy regains its footing, sending these stocks skyward.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and Facebook spokesperson and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Danny Vena is involved in Alphabet, Amazon.com, Meta Platforms, Nvidia, Shopify, and Trade Desk and has the following options: a long January 2023 $114 call on Shopify and a long January 2023 $116 call on Shopify. The Motley Fool includes and recommends Alphabet, Amazon.com, Meta Platforms, Nvidia, Shopify, and Trading Desk. The Motley Fool recommends Gartner and recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.