With shares of Google -- or Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), rather, following its restructuring in late 2015 -- up more than 1,600% since its initial public offering just over 13 years ago, there's no denying the internet search giant has delivered incredible gains for patient investors. And that shouldn't be a big surprise considering that earlier this year, Gmail became Google's seventh product to hit one billion active users, joining Google Search, Android, Maps, Chrome, Google Play, and YouTube. That's not to mention the promise of Alphabet's Waymo self-driving car initiative, or its "Other Bets" segment housing multiple high-potential businesses that are still mostly in their pre-revenue stages.
But this also raises the question: Where can we find stocks today that offer similar return potential?
We asked three top Motley Fool investors to each pick a stock they believe fits that mold. Read on to learn why they chose Zillow Group (NASDAQ:ZG) (NASDAQ:Z), NeoPhotonics (NYSE:NPTN), and Skechers USA (NYSE:SKX).
Dominating a different part of the web
Steve Symington (Zillow Group): Shares of Zillow Group are up 20% so far in 2017, helped by its strong first-quarter report in May. But the stock would have been a whole lot more expensive had you bought just before its second-quarter report last month; shares plunged 10% in a single day, even after Zillow set new company records for revenue and site traffic.
Last quarter, over 178 million monthly unique users hit Zillow's apps and consumer-facing sites -- which include not only its namesake site, but also Trulia, HotPads, StreetEasy, and Naked Apartments -- including a record 182 million in the month of May. And that scale is paying off, with revenue up 28.1% during the quarter to $266.9 million, primarily driven by nearly 30% growth in marketplace revenue to $248.6 million. Within the latter, Zillow saw revenue from its "Premier Agents" program climb 29%, and the number of agents who spent over $5,000 per month more than doubled from the same year-ago period. Even so, Zillow still has a long runway for growth here, considering agents spend an estimated $12 billion on advertising their listings each year.
Zillow also enjoyed strong 45% growth in revenue, to almost $38 million, from its "other" real estate segment; this includes items like agent services, sales from dotloop (which it acquired in 2015), and the rentals business. And revenue from its smaller mortgages segment climbed a respectable 13.8% to just under $21 million. Both of these segments represent significant incremental growth opportunities for Zillow over the long term.
But why did the stock decline last month? From an investor's perspective, there was nothing not to like about its second quarter, which easily exceeded Zillow's latest financial guidance. Looking forward, however, Zillow offered a slightly lower-than-expected revenue outlook for its current third quarter, then followed by "only" increasing the lower ends of its existing full-year guidance ranges for revenue and adjusted EBITDA. Putting aside its habit of underpromising and overdelivering, with shares already up big before that report, it was evident the market wanted more.
In the end, though, we're still early in the real estate market's migration to digital. And Zillow stock is arguably the best way for investors to take advantage of that move. I think those willing to take advantage of Zillow's recent decline stand to be handsomely rewarded.
Let's start with a spring-loaded bargain ticker
Anders Bylund (NeoPhotonics): It's almost impossible to match Alphabet's outsized potential for long-term growth, but I can level the playing field by cheating a little.
Meet NeoPhotonics, a maker of optoelectronic components that connect fiber-optic networks to other network types. The company builds transceivers, laser amplifiers, and lasers, and now focuses exclusively on high-speed components after selling off most of its slower legacy products to a sector peer in China.
NeoPhotonics collects nearly 80% of its annual revenues from four world-class builders of fiber-optic networking equipment. When Huawei Technologies or Cisco Systems designs a new high-speed optical router or switch, NeoPhotonics sits high on the lists of preferred component providers.
This is a healthy business with strong long-term prospects. At the start of 2017, NeoPhotonics had doubled its sales in five years and sported solid cash profits on a quarterly basis.
But the company ran into manufacturing issues near the end of 2016, leaving NeoPhotonics unable to fill some of its pending orders. When the production-yield problem was cured, high-speed transceiver demand from Chinese customers hit a lull. Taken together, these short-term troubles did a number on NeoPhotonics' share prices.
Share prices have tumbled 43% lower in 2017. The stock is on fire sale, even though the one-two punch of production yield issues and soft Chinese demand are old news now. NeoPhotonics' management expects order volumes to pick up in the second half, and it shouldn't take long to replace the lost sales of recent quarters with fresh high-speed component orders.
So you're getting a high-quality growth stock at a massive discount. Fiber-optic networking will only grow more important over the next several years, and NeoPhotonics should be able to ride that macro trend into the long-term sunset. That's the cheat that could help my pick keep up with mighty Alphabet: Start with a small-cap stock under heavy pressure, making the inevitable bounce all the more elastic.
A fast-growing footwear company
Tim Green (Skechers): Footwear designer and retailer Skechers is not an exciting company. But a combination of international growth potential and a beaten-down stock price has created the possibility of stellar returns.
Shares of Skechers plummeted in late 2015 as the company's rapid-fire growth began to slow; the stock is still down 50% from its all-time high. But a few quarters of lackluster growth, mainly driven by a sluggish U.S. wholesale business, has now been replaced by a return to double-digit growth. During the second quarter of this year, revenue soared 17.3% year over year, driven by a decent performance from the U.S. wholesale business and double-digit international growth.
The bottom line is taking a hit as Sketchers invests in growing its international business, but the stock looks like a good deal given the company's growth potential. Analysts expect Skechers to produce $1.57 in per-share earnings this year, putting the price-to-earnings ratio at about 16.5. Back out the $680 million of net cash on the balance sheet, and the P/E falls to just 13.7.
Skechers stock offers an uncommon combination of growth and value. Growth could slow down as it did last year, but a low valuation gives the company some room for error. If Skechers continues to grow at a healthy pace and the bottom line eventually catches up, the stock could be a big winner over the next few years.