The pounding that many high-growth tech stocks experienced in 2021 continued through the first week of 2022. The Federal Reserve has indicated benchmark interest rate hikes are coming fairly soon, and that has caused the market to reassess richly valued companies.
While a pullback was in order for many of these stocks, there are growing disconnects between their recent share price performances and their business trajectories. After surveying the carnage, three Fool.com contributors think Coinbase Global (COIN 1.37%), Latch (LTCH -1.30%), and Etsy (ETSY 1.06%) are being unfairly punished and are worth buying.
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Coinbase really shouldn't be this cheap
Anders Bylund (Coinbase): This situation is getting out of hand. Coinbase Global took another 9% haircut this week, leaving it down 18% over the last month. The digital asset trading specialist's shares now sit 47% below the 52-week high they set in November.
Considered from a different angle, Coinbase's stock trades at a perfectly reasonable 8.7 times trailing sales and a mind-bogglingly low 4.6 times free cash flow.
At these bargain-basement prices, this stock is practically begging to be bought.
I do understand why market makers are pushing Coinbase's stock lower. All the major cryptocurrencies have headed downward over the same period, led by a 32% decline in Bitcoin (BTC -1.09%) and a 28% drop for Ethereum (ETH -1.72%). Companies that specialize in cryptocurrency trading services must be suffering under these circumstances, right?
Bitcoin Price data by YCharts
Well, not so fast. Not only will Coinbase survive a temporary cryptocurrency market dip like this one, but it should actually thrive during a crypto market panic. Coinbase makes money when people make trades. Cashing out your Ethereum and Bitcoin holdings triggers trading fees.
The fourth-quarter report due out in February will either confirm or debunk my theory. Until then, there's no denying that Coinbase is trading at unreasonably low share prices, given its healthy cash profits and stability in the face of market volatility.
Time to lock in on Latch
Billy Duberstein (Latch): Real estate technology company Latch has had a horrible couple of months on pretty much zero company-specific news. In fact, the company's last major announcement was its third-quarter earnings report in early November, during which management described customer demand "we have never experienced," and raised its full-year bookings and revenue guidance.
Despite those positive business developments, macroeconomic fears about high inflation, interest rate hikes, and supply chain snags have decimated Latch's shares: They're down 37% over the past three months and down nearly 50% over the past six months.
Part of the selling pressure may reflect the manner by which it went public back in June -- via a merger with a special purpose acquisition company (SPAC). Virtually every company I've tracked that went public via the SPAC route has sold off hard, as it appears "SPAC" has become synonymous with 2021's speculative market excess. Yet SPACs are just a means to take companies public -- they don't say anything about the companies themselves.
Latch appears to be a good business that's getting thrown out with the bathwater. Last quarter, its revenue was up 120% year over year to $11.2 million, and total bookings rose 181% to $96 million.
Some may view its low revenue as an indication that Latch is a risky small cap, but that's not really the case. Latch sells hardware and software solutions based on multiyear contracts, often for six years, and often collecting cash in advance. Latch frequently signs letters of intent with real estate developers during construction as much as two years or more before it actually ships its products and recognizes revenue. So while revenue is only on course to land in the $38 million to $42 million range for 2021 (up 111% to 133%), its 2021 bookings are expected to land in the $355 million to $365 million range (up 115% to 121%).
Yes, the company is posting hefty net losses on a GAAP basis, but when you consider the multiyear visibility these contracts create, as well as the upfront payments, Latch is less risky than its headline numbers would suggest.
One number in the third-quarter report particularly caught my eye: Latch's annualized recurring revenue (ARR) for all current bookings, which grew by 126% to $59.8 million. That high-margin recurring software revenue is the real reason to be excited about Latch's growth opportunity, as its software has gross margins of more than 90%. Given that Latch's market cap has fallen to only about $880 million, one could note that Latch's price-to-sales ratio based on its software business alone is just 14.7. If an enterprise software company were growing revenue 126% year-over-year, its price-to-sales ratio would likely be much, much higher than that.
Amid the somewhat indiscriminate selling in high-growth names, meme stocks, and SPACs, Latch looks like one of the gems investors can find today in the rubble.
An e-commerce marketplace for the creator economy
Nicholas Rossolillo (Etsy): Though Etsy's growth rates slowed over the last year as it lapped its stellar 2020, the e-commerce platform company actually wound up delivering pretty good results for shareholders in 2021. The shares increased by 23% on the year. However, they have come under pressure during the first week of 2022, falling by 15% as of this writing to nearly 40% below the all-time high they touched in November.
While I'm not completely surprised at the recent sell-off (after all, even after the decline, Etsy trades for 47 times trailing-12-month free cash flow), I think the company's prospects are being underrated. First, it was news of the omicron coronavirus variant that initially sent Etsy into a tailspin in November. Yet it's already a foregone conclusion that consumer spending will continue despite the pandemic, and that rising COVID-19 concerns especially favor e-commerce. Paired with inventory shortages at retail chains, Etsy might surprise investors with a better-than-expected earnings report for the final quarter of the year.
Plus, let's not forget how Etsy has built itself into the leading marketplace for craftspeople and vintage goods. Loyal Etsy shoppers say they enjoy discovering unique and handcrafted items on the site, supporting small (and often local) businesses and proprietors, and the ability to interact with sellers and creators to customize their orders. And though it isn't perfect, small businesses and aspiring entrepreneurs have flocked to Etsy's platform because it itself isn't a retailer that competes with them, unlike Amazon (AMZN 2.76%).
It all adds up to a robust e-commerce business that is still growing revenue at a double-digit percentage pace, and it's highly profitable too (free cash flow profit margin was 26% over the last trailing 12 months) even though it continues to invest heavily in expansion. After the drubbing its stock has recently endured, I think Etsy is a solid investment pick again.
