It doesn't require taking high risks to double your money in a stock. Some of the best candidates are often found among the top growth stocks that are already on everyone's radar.
Sometimes great companies fall out of favor with market participants, and that provides an opportunity to buy shares before better news sends the stock higher again. This seems to be what's happening with Unity Software (U -7.13%) and Amazon (AMZN -0.26%) right now.
Another example of a candidate for doubling is eBay (EBAY -1.54%), which is valued like a slow-growing stalwart but whose current growth suggests it deserves a higher valuation. Here's why these stocks could double within the next three to five years.
Unity Software is the leading platform for creating and operating interactive content, including video games. It's also seeing increasing use outside of gaming, including by engineers, architects, and filmmakers, who rely on the company's software for 3D design work.
Unity has consistently delivered revenue growth of around 40% the last few years. It makes money from selling subscriptions (Unity Pro and Unity Plus) that provide access to a software license. The company also generates revenue from in-app advertising, and provides cloud services for multiplayer video games.
Management estimates its addressable market opportunity at $29 billion, but it could be much larger than that. The company has tremendous potential to expand its software platform beyond the video game industry to other use cases, as it's already doing. Management's 2021 guidance calls for revenue to increase between 29% to 31% year over year to reach $1 billion to $1.015 billion, and it expects to maintain this level of growth over the long term.
Traditional valuation metrics like price to earnings (P/E) are going to make Unity look very expensive. That's because it is investing all its gross profit into expanding its engineering team, adding more capabilities to its software platform, and expanding its technology infrastructure.
Because Unity is fundamentally a subscription business, it should be able to significantly leverage its costs to produce healthy margins over the long term. We can already see this playing out, as its adjusted operating loss narrowed from $91 million in 2019 to $50 million in 2020. Management expects its adjusted operating profit to reach breakeven by fiscal 2023.
If Unity achieves $3.1 billion in revenue by 2026, consistent with management's long-term guidance, and the stock sells for 20 times sales, which is lower than its current price-to-sales ratio of 27, the company would have a market capitalization of $62 billion. That would deliver a double over its current market cap of $28 billion.
Unity's stock price is down 35% year to date, which potentially sets up better returns for investors who buy and hold this growth tech stock for the next three to five years.
Amazon has gone from a small online bookseller to a massive business, with trailing-12-month sales of $419 billion. It now has more than 200 million Prime members. Given the convenience and savings Amazon provides, it's likely not even close to reaching a saturation point with Prime.
International revenue makes up only 28% of Amazon's business. There's tremendous potential to sign up more members in other markets by offering Prime Video as a gateway service into the broader Prime membership. International sales increased 50% year over year on a currency-neutral basis in the first quarter, much faster than the rest of the business. The surge in demand sent operating profit for the international segment to $1.2 billion, the fourth consecutive quarter that the once loss-prone segment turned a profit.
Most of Amazon's operating profit came from cloud services (Amazon Web Services) in 2020. The cloud segment still has many years of growth left, given that many businesses around the world are just starting their migration to cloud services to tap into more data processing, storage, and off-premise computing power. Overall, the improving profitability in the international segment and Amazon Web Services business should fuel further improvement on the bottom line.
The current consensus analyst estimate has Amazon increasing its trailing-12-month cash from operating activities to $200 per share by 2023, up from $131 per share. If Amazon continues to trade at its current price-to-cash-flow multiple of 25, which it has been for 15 years, the stock price could reach $5,000 in just the next two years, putting it well on pace to double by 2026.
Normally, analysts' price targets, which are more short-term focused, don't offer much value to the long-term investor. But it's worth noting that one analyst from Susquehanna Bancshares, a unit of Truist Financial, has a price target on the stock as high as $5,500, which seems quite reasonable when measured against Amazon's pace of growth, improving profitability, and current valuation.
eBay's business has come to life over the last year. After sluggish performance through 2019, revenue accelerated well above 20% year over year from the second quarter through the end of 2020. Revenue increased 42% year over year for the first quarter of 2021.
Investors don't think that rate will last. The stock currently sells for a modest P/E of 16.9, but that might be severely undervaluing eBay's renewed emphasis on delivering strong growth under CEO Jamie Iannone, who took over as chief executive in April 2020.
eBay saw its active buyer growth accelerate during the pandemic to 7% year over year, and management is capitalizing on that momentum by expanding into several new product categories, including authenticated sneakers, luxury watches, trading cards, and item customization. That last category is taking a page out of Etsy's playbook, with eBay starting to offer sellers the capability to provide personalized goods across the home, fashion, and jewelry categories.
Management's guidance calls for revenue growth in the second quarter to be between 8% to 10% on a currency-neutral basis. Analysts expect eBay to finish 2021 with revenue 17% higher over the prior year, before falling back to single-digit gains by 2023. However, over the next five years, the consensus analyst estimate has earnings per share increasing at an annualized rate of 13%, which would push the stock price close to a double without any allowance for a possible increase in the stock's P/E multiple.
Iannone continues to sell off eBay's noncore assets -- such as the current deal to have Adevinta buy its Classified business -- and return capital to shareholders through dividends and share repurchases. As a result, the company could see its valuation multiple gradually drift higher, since investors love companies that focus on increasing shareholder returns. If eBay's P/E multiple stretches closer to 20 times earnings to reflect the improved growth outlook, which would still be below the average multiple of the S&P 500 index, its stock could double in value.