It took just days for online tech retailer Newegg (NEGG -2.94%) to go from IPO stock to meme stock. After a lackluster beginning of public trading in late May, reports surfaced that the company had supply of highly sought after NVIDIA RTX 30 series graphics cards, and the stock promptly went from just over $10 a share to briefly over $70 a share in early July. Since then, the share price has been cut in half from its peak as detractors have started betting against the e-tailer, but early Newegg investors are nevertheless still sitting on a hefty return in short order.
Newegg isn't the only company out there with the potential for big gains. Three Fool contributors think PubMatic (PUBM -0.43%), Limelight Networks (EGIO -8.78%), and Sea Limited (SE 0.03%) deserve your attention right now, too.
Another hot ad-tech stock
Nicholas Rossolillo (PubMatic): Digital advertising software has been a hot segment of the IT world lately. The migration to virtual marketing and ads was already underway, but the pandemic turbocharged the shift in corporate spending. Mobile ad spending in particular is forecast to grow 23% this year and surpass $100 billion, according to researcher eMarketer. It's amid this backdrop that PubMatic made its public debut in December 2020.
Shares doubled in value out of the gate on investor optimism, but PubMatic stock reversed course and is back where it started in December as of this writing. But there's nothing wrong with this ad software firm. It delivered 54% year-over-year revenue growth in the first quarter of 2021, and expects full-year sales to increase at least 31% from last year to $195 million. It also has zero debt, $110 million in cash and equivalents, and is profitable -- an enviable setup not every digital ad technologist can boast having.
After the Q1 update and the stock's big cool off, PubMatic trades for under 10 times trailing-12-month sales and about 7.5 times expected full-year 2021 sales (based on a current market cap of $1.5 billion). Given how quickly this firm is growing and the large and still expanding digital marketing industry it operates in, this looks like one heck of a long-term value -- one slightly reminiscent of where industry peer Magnite was last summer before it went on an absolute tear.
I'm not a PubMatic shareholder for the potential short-term payoff. I like the company's long-term prospects as a tiny niche player with ample cash to continue expanding within the advertising world. Business is growing rapidly, but the stock has gotten the cold shoulder as of late. Right now looks like the right time to make a PubMatic purchase.
Rumors of Limelight's death have been greatly exaggerated
Anders Bylund (Limelight Networks): Just a couple of weeks ago, I recommended Newegg to new investors. A torrential amount of water has flowed under the bridge since then and the stock has gained nearly 40% while also showing an excessive level of volatility. Therefore, I wouldn't buy Newegg today but I will keep a close eye on it in search of another solid entry point.
Today, I recommend picking up a few shares of Limelight Networks at a bargain-bin price.
The content delivery network (CDN) specialist has seen share prices fall more than 60% over the last 52 weeks, including an 18% drop in the last 30 days. The price drop makes sense on the surface, driven by a couple of disappointing earnings reports and turnover in the executive suite. Under new management, Limelight is implementing an aggressive turnaround plan with significant cost savings and ambitious productivity goals. Sudden strategy overhauls are often painful in the short term, even if they bring solid benefits for the long haul. Therefore, market makers are neglecting Limelight right now.
But the company is a firmly established force in the market for video CDN services, and that's a thriving sector nowadays. The digital content gold rush brings more competition, which gives the bears something to talk about, but that's not the whole story. We are still in the early innings of the growth story for media-streaming services. Limelight serves that vibrant market on a global level, adding a touch of edge computing tools that allow its customers to run more advanced and personalized video services. There is room for many winners in this target market, and Limelight is prepared to grab a slice of the global pie.
The company generated $10.3 million of operating cash flows over the last four quarters and holds a healthy $117 million of cash equivalents on its balance sheet. Putting that cash to work should not be a problem amid this secular shift to streaming media services.
But the stock is priced for absolute disaster at 1.5 times trailing sales. CDN peers Akamai Technologies and Fastly trade at 5.8 and 18.1 times trailing sales, respectively. Limelight's stock could double or triple before it starts to look expensive, and I fully expect the business to go places after this intermission. This should be a good time to start a long-term Limelight position at a fantastic price.
It's not just Free Fire, it's a super-app with hypergrowth
Billy Duberstein (Sea Limited): Sure, Newegg has a nice little niche in online electronics, but rather than hopping on the latest meme-stock momentum, it seems less risky to go with perhaps a more durable and diverse platform executing at the top of its game.
While the U.S. has its share of conglomerates, leading internet companies overseas tend to combine features of our FAANG stocks often under one corporate roof. Hence the term "super-app."
Perhaps the most exciting super-app in the world right now is Sea Limited, an emerging giant in Southeast Asia, with eyes on the Latin American market as well. Sea Limited began as a video game distribution and communications platform for gamers, but in 2015, Sea ventured into the worlds of e-commerce and digital payments, setting its sites on Southeast Asia, where internet usage and e-commerce were very under-penetrated.
Managed by founder and owner-operator Forest Li, Sea Limited has proven to be massively successful across every type of businesses it tries, and across every country in which it operates -- a list that's expanding.
Its first in-house developed game was Free Fire, which has become an international smash hit. Despite Free Fire coming out in late 2017, it continued to be the highest-grossing mobile video game in India, Latin America, and Southeast Asia into the first quarter of 2021. Last quarter, the company's Garena gaming segment saw users increase 61% to 649 million, paying users increase 124% to 80 million, revenue increase 111%, and adjusted EBITDA increase 140% to $717 million.
You might wonder what a video game company has to do with e-commerce, but actually, Garena helps Shopee, Sea's e-commerce platform, in various ways. First, Free Fire is not just a game, but rather a social experience, where players can actually hang out inside the game and socialize via avatars. Sea can promote its Shopee e-commerce platform within Free Fire, and has chosen to expand into Latin America largely due to the popularity of Free Fire in that region.
Second, the company can use its profits from the gaming segment to invest heavily in e-commerce, with promotions and shipping discounts to drive revenue, user growth, and loyalty, all while losing lots of money in the present. In fact, Shopee's adjusted EBITDA losses were ($413 million) last quarter, an increase over the ($264 million) EBITDA loss a year ago. Yet losses per order declined, as last quarter saw gross merchandise volume surge 103%, and revenue grow an even higher 250%, as take rates increased.
Then of course, any e-commerce platform in an underbanked region of the world is bound to benefit from its own digital payments platform. Although this business is relatively small for Sea, it's growing fast. The company's total payment volume (TPV) in its mobile wallet was up 200% last quarter, and revenue for digital financial services nearly quintupled.
So while Newegg may have a fashioned itself a nice little niche, Sea Limited's hypergrowth across not one but three huge businesses in multiple developing markets makes it the better buy for the long-term investor today.