Despite the market rebound over the last month, there are plenty of stocks still trading off recent highs that present good buying opportunities.

Farfetch (NYSE:FTCH) and Electronic Arts (NASDAQ:EA) are two such stocks to keep an eye on. Farfetch operates a digital shopping platform that allows luxury brands to connect with consumers. Sales have grown exponentially over the last five years, as brick-and-mortar spending shifts online. 

Electronic Arts is one of the world's leading video game makers. Its biggest franchises include The Sims, Madden NFL, FIFA, and Battlefield. The video game industry offers long-term growth potential for investors, but EA is also in position to deliver results this year, as more people remain highly engaged with popular titles while stay-at-home orders are in place.

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Image source: Getty Images.

Farfetch: Benefiting from the digital shift in luxury spending

Farfetch stock offers enormous growth potential over the long term. Its revenue totaled $142 million in 2015 but crossed $1 billion last year. That is still low given the size of the $300 billion luxury goods industry, which is highly fragmented with hundreds of different brands trying to stand out in a competitive digital economy. Many luxury sellers lack the necessary shipping infrastructure to deliver goods to customers efficiently, and that's where Farfetch comes in. 

The company currently has over 1,200 brands from around the world selling on its platform. Farfetch works with these sellers to create digital marketing campaigns to let their brands stand out. It also provides sellers an efficient means to ship orders to customers through the Farfetch fulfillment network.

Farfetch also owns Stadium Goods, one of the largest online marketplaces for premium sneakers, and New Guards Group, which manufactures and distributes luxury streetwear brands, such as Off-White, Heron Preston, and Palm Angels. New Guards has over 50 franchised retail stores. 

There are near-term headwinds to watch. About 350 sellers are currently offline due to the COVID-19 outbreak and are unable to process orders right now, and a small number of Farfetch's retail stores are closed. 

Travel is also important to the luxury goods industry, but with flights being limited in the current environment, there could be a potential shortage of inventory later in the year, which could affect the fall-winter 2020 fashion season. 

During the 2009 recession, the luxury goods market shrank 8% before it rebounded strongly the following year. But Farfetch should be fine in the short term, since it has $422 million in cash and only $168 million of debt. 

While it's unclear how quickly consumer spending will recover once stores reopen, Farfetch will continue to benefit from more consumers turning online for luxury goods, and the current crisis will likely accelerate that trend. 

Over the next decade, digital transactions are expected to grow significantly as a percentage of the total luxury goods industry. Farfetch just reported robust growth rates in its first-quarter results. Revenue increased by 90% year over year, with gross merchandise volume (GMV) up 46%, and digital GMV up 19%. Farfetch is continuing to gain market share, as it is growing much faster than the 4% rate of the industry last year. 

While no one knows what the next 12 months will look like, the stock is already pricing in low expectations, give that the share price has been beaten down since the initial public offering in 2018, likely due to valuation concerns. Similar to many upstarts, Farfetch has plowed all of its resources into growth, which has pressured near-term profitability, but management expects to reach positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) by fiscal 2021.

While the stock rebounded sharply after the release of preliminary first-quarter results in April, investors are still undervaluing the company's long-term growth potential. Farfetch currently has a total market value of $5.5 billion on annual revenue of over $1 billion, providing plenty of upside in a growing $300 billion industry. 

Two real life NFL players depicted in EA's Madden NFL 20 video game.

Image source: Electronic Arts.

Electronic Arts: New players are joining the fold

Electronic Arts just reported a solid fiscal fourth quarter, which ended in March. With no live sports to watch, some are now spending time playing sports video games and watching esports tournaments. EA said that hours watched for FIFA esports increased 135% year over year in April, while Madden esports saw a jump of 115%. Many new players have started gaming recently, and this gives EA a great opportunity to build lasting connections with this new audience. 

For fiscal 2020, EA's revenue topped $5.5 billion, with $2.7 billion of that generated from players spending money on in-game content, or live services. In the Ultimate Team versions of Madden and FIFA, for example, players can buy digital cards that unlock star athletes, which are then used to assemble a fantasy team to take online to compete with other players. With about half of its revenue coming from in-game spending, EA has a good buffer against a potential slowdown in new game purchases.

The Madden franchise just had a record year in player engagement. Some investors might be concerned about potential competition with Take-Two Interactive, which just struck a deal with the NFL to make a series of football games over the next several years. But this really has no bearing on EA, since Madden is a simulation football game, while Take-Two's games will be what the two parties called "non-simulation experiences" aimed at a casual gaming audience. 

As for the impact of COVID-19, EA is not seeing any material disruption to its production schedule for new games and content. Employees continue to work on games at home, which is a huge advantage for video game companies given the digital nature of the content. 

The only disruption EA could experience in the near term is physical game sales at store locations such as GameStop. But EA reported during its recent conference call that full-game digital purchases are higher than is typical for this time of year, which management attributed to the stay-at-home environment. Last year, digital purchases made up 78% of EA's revenue. 

Management expects performance to be even better in the June-ending quarter. EA's record for the fiscal first quarter is $0.31 in earnings per share, but management expects to earn $0.70, given the higher engagement it is seeing across some of its games. 

It's not clear if the high engagement levels will last once the stay-at-home orders are over, but EA is continuing to invest for long-term growth. As of now, management plans to release 14 new games this year, including more games on more platforms, such as Alphabet's Google Stadia, Steam, and Nintendo Switch.   

The stock has been rising in recent months, but at a share price of $118 at the time of this writing, it is still off its all-time high of $151.26 in 2018.