Much of last year was dominated by a global pandemic, so starting in 2021, investors could not foresee the problems ahead. Now, just 12 months later, supply chain weaknesses helped fuel 40-year high inflation, the highest interest rates in nearly 15 years and the worst bear market in more than a decade. Sheesh.
As a result of the economic hype, many former high-flying stocks have fallen on hard times. However, for those who see the glass as half full, investors are being presented with a rare opportunity to purchase these high-quality companies at a discount.
When there are many options, it can be difficult to separate the wheat from the chaff. To make things easier, let’s narrow down the field and look at three companies that have all the stocks ready to go: industry leadership, 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 (IN THE STORE -0.78%) quickly became known as a leading provider of software-as-a-service (SaaS) tools to enable digital retail for merchants.
However, after years of unbridled growth and locked-in profits, the e-commerce platform has seen a turnaround. Complicated payments, a slowdown in online spending and persistent inflation have caused growth to slow to a crawl. Investors would be forgiven for thinking that Shopify’s best days might be behind it.
However, even if the growth of e-commerce seems to have ended, there are still many green shoots that indicate that life is about to flare up. Shopify reported record sales over the Black Friday/Cyber Monday weekend, up 19% year-over-year and 21% in constant currency. Amazon also reported record sales, saying it was the company’s “biggest holiday shopping weekend ever.” With the world’s largest digital retail platforms reporting record sales, it is unlikely that e-commerce has met an early death.
There’s more. E-commerce growth may have stalled for a while, but the underlying secular winds are picking up speed. The global e-commerce market is expected to exceed $3.3 trillion in 2022 and grow to $5.4 trillion in 2026, according to data. Morgan Stanley.
Additionally, Shopify estimates that the total addressable market is $160 billion. When viewed in relation to its 2021 revenue of $4.6 billion, the missed opportunity is clear.
2. Nvidia: Gaming performance is down, but not
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, Nvidia’s third-quarter 2023 revenue (ended Oct. 30) rose just 3% year-over-year, driven by a 33% drop in gaming chip sales.
But Nvidia isn’t the only one 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. 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 semiconductor specialist in the game is only the tip of the iceberg. Nvidia is also one of the leading providers of processors used by data centers and cloud computing to accelerate over-the-air traffic, and is the top choice of every leading cloud computing operator in the world. As a result, data center revenue grew 31% year-over-year in the third quarter.
This is just the beginning. Last year, Nvidia generated record revenues of $26.9 billion, a drop in the ocean compared to its huge opportunity. Management believes its addressable market is a whopping $1 trillion, which helps illustrate the significant runway.
3. The Trade Desk: The flag bearer of digital advertising
No one holds a candle to programmatic advertising Trading desk (TTD 4.97%). The company’s advanced adtech platform automates real-time digital ad buying, helping marketers get more bang for their buck.
Trade Desk is a pioneer in this field and continues to disrupt the status quo. The company built a broad coalition of the world’s biggest advertisers, all of whom have rallied around its Unified ID 2.0, the heir apparent to the ad-tracking cookie that’s quickly going the way of the dinosaurs. Trade Desk also introduced OpenPath, which cuts out the middleman and provides direct access to premium advertising inventory for those using its platform.
To fully appreciate its position in the industry, let’s compare The Trade Desk’s latest results with its two biggest competitors. In the third quarter, the king of digital advertising Alphabet revenues grew by only 6%, while Meta platforms revenues decreased by 4%. In contrast, The Trade Desk’s revenue rose 31%, helping to illustrate its clear advantage.
Although 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. Trade Desk’s much higher growth rate suggests that it is stealing market share from its competitors, which bodes well.
Trade Desk generated $1.12 billion in revenue in 2021, which pales in comparison to its untapped potential. The global advertising industry reached $772 billion in 2021, but is predicted to exceed $1 trillion by 2026, giving The Trade Desk plenty of fertile ground to plow.
A few words about evaluation
It’s 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. Trade Desk, Nvidia, and Shopify sell for 14, 14, and 8 times next year, respectively, at a reasonable price-to-sales ratio of typically 1 to 2. However, given their strong historical performance and significant upside, it’s not surprising that investors will assign these shares the highest quality rating.
Those with the patience to allow the recovery will be greatly rewarded as the economy regains its footing, sending these stocks skyward.
John Mackie, CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former CMO and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s Board of Directors. Susan Frey, CEO of Alphabet, is a member of The Motley Fool’s Board of Directors. Danny Vena has positions in Alphabet, Amazon.com, Meta Platforms, Nvidia, Shopify and Trade Desk and has the following options: Long January 2023 $114 calls on Shopify and Long January 2023 $116 calls on Shopify. The Motley Fool takes positions in and recommends Alphabet, Amazon.com, Meta Platforms, Nvidia, Shopify and Trade Desk. The Motley Fool advises 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.