Without fail, investors start getting anxious when the stock market hits all-time highs, like it is right now. They fear stocks are getting too expensive when the market reaches fresh highs. This isn't necessarily true -- stock valuations should be considered in context on an individual basis -- but nonetheless this anxiety is prevalent.
However, just because the market is hovering near highs, that doesn't mean every stock is up. In fact, high-quality businesses like Zoom Video Communications (NASDAQ:ZM), Wix.com (NASDAQ:WIX), and Roku (NASDAQ:ROKU) are all down sharply over the past few months. So put general anxiety aside and consider why these three stocks could make great additions to any portfolio right now.
Zoom: Down 25% from its 3-month high
In 2020, many people started working remotely from home. But the exclusive work-from-home trend doesn't look like it's sticking around. Rather, companies are adopting a hybrid model -- working both from home and in the office. According to a recent study from Accenture, 83% of workers approve of the hybrid model. And 63% of high-growth companies plan to permanently implement the hybrid model going forward.
Here's why this is important for Zoom: Companies will still need a video-conferencing tool for the foreseeable future. It doesn't matter that companies might use Zoom less in coming years than they did during the height of the COVID-19 pandemic. The point is they'll likely continue subscribing to keep their hybrid workforces going.
Recent financial results from Zoom seem to confirm this new reality. The company continues to grow its customer count even though the pandemic catalyst has faded into the rearview mirror. In fact, it finished the second quarter of its fiscal 2022 with 2,278 customers spending over $100,000 annually -- that's an increase of 14% just from the previous quarter. For perspective, this high-spend customer base now makes up 20% of total revenue.
Zoom isn't going anywhere and has plenty of good growth ahead. But what also makes this an intriguing investment right now is the stock has never been cheaper from a valuation perspective. The stock now trades at a price-to-sales ratio under 25, which is the lowest it's ever been.
Wix: Down 29% from its 3-month high
Forget what you know about Wix for a moment and consider the following three facts. First, the company grew registered users 15% year over year and 5% quarter over quarter in the second quarter of 2021. Second, Wix users tend to spend more over time, as evidenced by its net revenue retention rate of 113% in Q2. Third, the company is actively preparing for much more growth by rapidly increasing its workforce 10% from last quarter and by building out its new $30 million headquarters.
In my opinion, these three factors are indicative of strong business fundamentals. But the market has lost interest in Wix stock because of some near-term uncertainty regarding how the economy might react to new strains of the coronavirus. Essentially, some entrepreneurs worry that starting a new business -- even online -- might not make sense if pandemic is worsening again and puts new stresses on their would-be customers. It's a valid concern but it affects the short term. For the long term, Wix seems to be sitting on a firm foundation.
Consider that the majority of Wix's revenue comes from creative subscriptions -- buying a domain and building a website, among other things. These subscription products result in high-margin, recurring revenue. Currently, its annual recurring revenue is at $967 million -- up 22% year over year. To me, with a market capitalization of just $12 billion, Wix stock is a great value based on its ARR and ongoing growth potential.
Roku: Down 32% from its 3-month high
Investors appear to be shying away from Roku stock lately for two reasons. First, it seems the connected-TV space is getting more competitive. For example, Amazon just launched its first TV with its operating system built in, directly challenging Roku's CTV operating-system dominance. Second, Roku stock trades with a P/S ratio of around 20 -- a lofty valuation that's more than double where it traded just five years ago.
To the former concern, consider how Roku could still be a major winner even if the competition encroaches on its turf. According to eMarketer, CTV ad spend is expected to grow 49% year over year in 2021, and thereafter at a nearly 20% compound annual growth rate through 2025. And according to FreeWheel, Roku currently demands a whopping 43% of CTV ad slots, meaning this company should benefit from the massive growth in CTV ad spend even as competitors attempt to steal market share.
To the latter concern, Roku is more deserving of a higher P/S multiple now than it was five years ago. Here's why. Companies with low profit potential typically get cheaper valuations. But Roku's profit margin has consistently expanded over time as low-margin hardware revenue is superseded by its high-margin ad revenue. At the end of 2016, the company's gross profit margin was just 30%. In the most recent quarter, it was 52%. This upward trend looks poised to continue and that's why this stock isn't as expensive as it seems at first glance.
For these reasons and more, Roku looks like an opportunistic long-term buy right now. In fact, Roku, Wix, and Zoom all appear poised to beat the market average over the next five years. So if you've never given these stocks a hard look, now's a great time to give them some serious consideration. Don't let the market's all-time highs keep you fearfully on the sidelines.