Right now, there's one question keeping a lot of investors up at night: When's the next market crash?
For most investors, 2020 has been an extreme roller coaster ride, swinging between record highs and brutal drops. In late February, the S&P 500 index hit record highs. Roughly one month later, the S&P 500's value had plunged over 34%. While many stocks have since recovered and several are now trading near all-time highs, this year has provided ample evidence that there's no telling what could happen next. The ongoing COVID-19 pandemic, U.S. trade tensions with China, and oil markets turmoil all increase the risk that another market correction could occur (potentially soon).
Even if it does come, the good news about market corrections is that stock prices almost always come back stronger after, especially for well-run companies. In other words, a market crash is a good time to invest in high-quality stocks. On that note, let me share two solid growth stocks that investors should consider buying in the next market correction.
Pinduoduo (NASDAQ:PDD) is one of China's three e-commerce giants, alongside JD.com and Alibaba. Despite being a latecomer -- Pinduoduo only launched in 2015 -- it has managed to become a top-three player thanks to a focus on social e-commerce and bulk purchase. Pinduoduo allows customers to pool orders into one bulk purchase in exchange for a discount. As part of its marketing strategy, Pinduoduo leverages China's generational affinity for social networks, encouraging users to recruit their friends from WeChat (China's leading social media platform) to help them get discounts.
Smart execution has resulted in a mind-blowing track record, with revenue rising from zero in 2015 to 37 billion yuan in the trailing 12 months. Pinduoduo's strong performance continued in the latest quarter, with revenue up 89% year over year on the back of increasing annual active buyers (up 36% to 731 million) and annual average spending per buyer (up 27% to 1,567 yuan).
Pinduoduo looks poised to sustain its high growth rate over the next few years, riding on a few important trends. The obvious one is the continued growth of e-commerce, driven by China's GDP growth and higher market penetration of e-commerce. A less obvious -- yet equally massive opportunity -- is Pinduoduo's recent foray into the agri-tech industry, which might push its agriculture annual gross merchandise value (GMV) from 136 billion yuan in 2019 to 1 trillion yuan in the next five years.
The company has exciting prospects but it's currently trading at a very high price-to-sales ratio of 37 (based on 2019 revenue). Buying at such high valuations leaves little margin for safety, so investors should wait for a more reasonable price (which could come during a broader market correction).
2. Sea Limited
Sea Limited (NYSE:SE) packs a triple punch, comprising Southeast Asia's biggest gaming company (Garena), the region's top online shopping platform (Shopee), and a fast-growing digital finance business (Sea Money). Garena shot to fame with blockbuster mobile games like Free Fire, while Shopee came from behind to overtake Alibaba-backed Lazada in regional e-commerce. Sea's success can be attributed to its deep customer-centric execution -- enabling it to meet the region's eclectic mix of cultural preferences -- and solid backing from Tencent Holdings, which owns 25.6% of the company.
While Sea has only been around since 2009, its growth story is nothing short of monumental. Between 2015 and 2019, yearly revenue rose more than sevenfold to $2.2 billion. This impressive growth trajectory looks set to continue in 2020: Q2 revenue more than doubled year over year to $882.0 million, driven by an increase in e-commerce and gaming incomes. The former grew on the back of higher GMV and take rate, while the latter gained from a higher number of paying users.
Sea's lead position in Southeast Asia's burgeoning e-commerce sector gives investors a way to play an explosive growth story. While Shopee will likely face stiff competition from the likes of Lazada in the coming years, the market looks big enough for at least a few players. Between 2019 and 2025, regional e-commerce GMV is expected to grow 300% to $153 billion a year, according to a study by Alphabet's Google, Temasek, and Bain and Co. For context, Shopee's GMV in 2019 was $17.6 billion -- implying a long runway for growth.
So is Sea Limited a buy now? After the stock price rallying over 500% this year, Sea has a high price-to-sales ratio of 37 (based on 2019 revenue). Investors may want to wait for a more attractive entry point that could present itself during a broader market correction.