These companies hold strong positions within their sectors. When allocating resources for investment, one advisable approach is to seek out stocks considerably below their historical peak values. This strategy may unearth hidden opportunities, as these stocks tend to carry the potential for substantial gains, mainly when market sentiment is overly pessimistic. Crucial attributes of an attractive investment include a strong competitive edge and significant prospects for growth.
With these criteria in mind, three growth stocks have taken a beating recently but are currently ripe for investment. These could significantly enhance the returns of your portfolio.
Etsy
Etsy’s (NASDAQ: ETSY) stock has plummeted by 69% from its highest value at the time of writing. The company is grappling with a significant post-pandemic downturn, as evidenced by drastically slowing revenue growth and gross merchandise sales (GMS). The need for consumers to turn to the website for essentials such as face masks, as they did in the past, has noticeably diminished.
However, investors should not be too quick to panic. Etsy’s user base, with 7.9 million active sellers and 95.5 million active buyers, has continued to grow yearly, signifying enduring value in the marketplace.
Etsy’s unique business model connects buyers and sellers via its digital platform without holding inventory. This frees up capital and accounts for the company’s consistent profitability.
In 2022, Etsy’s GMS reached $13.3 billion. Company leadership views this as only a tiny fraction of the total market potential. If we consider Etsy’s seven primary markets – the U.S., Canada, the U.K., France, Germany, Australia, and India – the GMS opportunity within the sectors Etsy serves totals $466 billion. This indicates vast room for growth moving forward.
PayPal
PayPal (NASDAQ: PYPL) stands out compared to most fintech stocks due to its remarkable profitability. Despite this, the stock has experienced significant drops and is currently 80% below its peak in July 2021. With a price-to-earnings ratio of 27, lower than its average of 50, this presents an unusually appealing investment opportunity.
Much like Etsy, PayPal is experiencing a slowdown in growth, a reasonable outcome considering the normalization of consumer shopping patterns, with e-commerce popularity declining compared to peak pandemic times. Additionally, persistently high inflation levels negatively impact PayPal, given its leaning towards discretionary purchases – items consumers postpone buying during difficult times.
However, PayPal has consistently proven to be a reliable source of income. In 2022, it generated $5.1 billion in free cash flow from $27.5 billion in revenue, enabling management to repurchase substantial shares. The company is well-equipped to weather potential extended economic downturns due to its robust financial standing.
Moreover, growth prospects remain exceptional, with financial analysts predicting that revenue and diluted earnings per share will grow at annual compound rates of 10.7% and 28.2% over the next five years.
Roku
Roku’s (NASDAQ: ROKU) stock has seen an astounding 85% drop from its all-time high in July 2021 and currently has an attractive price-to-sales ratio of 3.2. Despite a significant slowdown in revenue growth to 1% in the first quarter of 2023, Roku remains a business with immense potential.
Most investors acknowledge that the streaming industry is highly competitive, with giants like Netflix and Walt Disney and smaller competitors all investing heavily to draw in viewers. Roku benefits from this scenario as it positions itself as a neutral platform, growing alongside the entire industry.
Charlie Collier, Roku Media’s president, affirmed during the company’s Q1 2023 earnings call, “I’ve said it before, and I’d say it with pride, Roku is not in the streaming wars. The streaming wars are being played out on our platform.”
Roku’s management team anticipates the streaming entertainment trend to continue surpassing traditional cable TV. Ad dollars are expected to follow suit as this consumer preference shift persists. eMarketer predicts that the connected-TV advertising industry in the U.S. will nearly double from $21 billion in 2022 to $41 billion in 2027, and Roku is ideally positioned to capitalize on this growth.
These three companies – Etsy, PayPal, and Roku – present investors with prime opportunities for reaping significant returns. Despite their recent dips, these stocks are undervalued and primed for substantial growth in their respective industries. These companies’ unique business models, consistent profitability, and favourable market trends hint at a promising future. With their considerable growth potential and current undervalued status, they are all worth considering as additions to any well-balanced investment portfolio.
