Through the pandemic, some companies were perfectly positioned to gain from the growing demand for e-commerce, remote work, and digital content. Their stocks skyrocketed to valuations not seen since the dot-com bubble. The recent swoon in technology stocks has brought some of them back to Earth, and that has created an opportunity.
Shopify (SHOP -2.37%), The Trade Desk (TTD -0.54%), and Fiverr (FVRR -2.00%) have all seen amazing stock appreciation in the past year. Although the stocks have recently sold off, they continue to put up impressive numbers. That could make the current sell-off a great time to buy shares. Although each may face tough comparisons to last year's growth, the economic trends fueling the businesses aren't going away anytime soon.
Image source: Getty Images.
1. Shopify
Shopify is designed to be a one-stop shop for starting, growing, and managing a retail business of any size. By offering many front-end channels tied to an integrated back end, the company has become the platform of choice for merchants. Add in a growing ecosystem of developers who have produced more than 6,000 apps, along with the company's fulfillment network, and it's not hard to see how Shopify has become one of the bellwethers of e-commerce.
The business has two revenue streams. Subscription solutions is the recurring payment from merchants for use of the platform. It's offered at different service and pricing levels. Merchant solutions revenue is derived primarily from Shopify's payment processing. However, additional revenue in the segment comes from tools like advertising on the company's app store, lending, and the fulfillment network.
The approach has been wildly successful. Although the stock is 26% off of the all-time high, it's up almost 4,200% since going public in 2016. During that time, annual gross merchandise volume (GMV) -- the total dollar value of orders processed on the platform -- has grown from $15.4 billion to $119.6 billion in 2020. It's not slowing down. In the just reported first quarter of fiscal 2021, Shopify reported the GMV jumped 114% year-over-year to $37.3 billion. That growth has highlighted how effectively the platform will scale. Free cash flow for 2020 came in at $383 million, compared with only $8 million in 2019.
Although management expects growth to slow a bit this year, the trajectory is clear. At nearly 41 times sales, the company will have to keep up the torrid pace for years to justify the valuation. So far, there is no reason to doubt that it will.
2. The Trade Desk
The Trade Desk offers a data-driven, cloud-based platform that allows customers to create, manage, and optimize digital advertising campaigns. These campaigns can run across multiple channels including connected television, social media, web pages, and audio. Revenue has more than quadrupled since 2016, coming in at $836 million in 2020. The company has been profitable since 2017 and converted 29% of sales last year into profits. That's right in line with advertising giant Alphabet. Investors have taken notice. Shares are up 540% in just the past three years.
Learning that, it might be surprising to find the stock down almost 30% over the past month. That drop came even after management reported 37% year-over-year revenue growth in the first quarter and projected 87% in the second quarter. The issue investors have is the company's unwillingness to offer any guidance for profits.
The fear is that profitability may suffer as Google is set to phase out third-party cookies that track users across the web. According to Trade Desk CEO Jeff Green, those cookies are only relevant to internet browsing, a segment that impacts 20% of data-driven ads. Some details are new, but Google made its intentions clear long ago. That's why Green led the charge for an alternative, called Unified ID 2.0. He feels the alternative could end up being a positive, benefiting publishers, advertisers, and consumers without being controlled by Google or Apple. If Green's prognostication proves true, the current sell-off would offer a rare discount on shares of The Trade Desk.
3. Fiverr
Fiverr's mission is to change how the world works together. Its platform connects freelancers to buyers and is rapidly gaining traction in what management believes is a $115 billion addressable market. Fiverr has continued to add products and support for its freelancers like e-learning content, business management software, and marketing. In that way, its model is similar to Shopify's. It makes money by helping those on its platform be successful.
It has parlayed exceptionally high loyalty scores from both buyers and sellers into $224 million in revenue over the past 12 months. That number grew 100% year-over-year in the recently reported first quarter. Management is calling for 59% to 63% revenue growth for the full year.
Unless 2020's pandemic-fueled expansion proves too difficult a hurdle to clear, that projection may be conservative. All of the key operational metrics in the first quarter point to compounding growth. Active buyers, spend per buyer, and Fiverr's take rate of the transaction were all up.
| Metric | Q1 2021 | YoY Change |
|---|---|---|
| Active buyers | 3.8 million | 56% |
| Spend per buyer | $216 million | 22% |
| Take rate | 27.2% | 27.1% |
Data source: Fiverr. YoY = year-over-year
That continued success makes it surprising that the stock is down 44% in the past three months. As the economy gets back to normal, investors are clearly expecting the market for freelance work to slow. That said, some trends that took hold over the past year will undoubtedly persist. Freelancing was already growing heading into the pandemic, so it should be a trend that sticks. If that's the case, expect shares of Fiverr to rebound as the market catches on to the new normal.
