Many formerly high-flying stocks have seen their share prices drop significantly over the last few months. How investors react to this market correction will say a lot about their investing strategy and how their portfolios perform long-term.
Traditionally, adding to winning stocks over time while letting losers run out with no further investment has been an outperforming proposition over the long term. However, I believe there may be a few exceptions to this rule, especially for companies whose long-term investing thesis remains intact, despite their recent stock declines.
Today we will look at three of these companies and explore why their freshly discounted share prices and favorable growth rates look to be a fantastic pairing for long-term investors.
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1. Coinbase Global
Down over 56% from 52-week highs set in November, Coinbase Global (COIN +4.25%) stock now trades at a price-to-earnings ratio of just 22. Aiming to "create an open financial system for the world," the massive cryptocurrency platform has exploded onto the investment scene, recording nearly $3 billion in net profits over the last year.
While these earnings will most likely prove to be uneven, if not volatile, over the next handful of quarters, it nonetheless highlights the massive profitability potential Coinbase could offer over the long term.
What should be most encouraging to potential investors is that the company grew quarterly sales for the third quarter by 316% year over year, highlighting that its growth story is still just beginning. Spurring this incredible growth, Coinbase grew its monthly transacting users from 2.1 million in Q3 2020 to 7.4 million in Q3 2021 and now has over 73 million verified users.
Thanks to these users, Coinbase generates most of its revenue from transaction fees but has historically been somewhat dependent upon Bitcoin. However, this overdependence seems to be slowly fading, as Bitcoin now only accounts for 21% of transaction revenue compared to 44% just three quarters ago.
Overall, the total cryptocurrency market capitalization was roughly $2 trillion at the end of Coinbase's Q3 -- meaning that its $255 billion in assets on the platform give it a 13% share of the crypto market. In addition to this substantial market share, business database and analysis company Comparably has Coinbase ranked 24th in its Top Brands for Millennials list, highlighting the company's first-mover advantage in terms of mindshare.
Coinbase's blend of high sales growth, brand awareness, and massive profitability make it a great bargain to hold for the long term.
2. Airbnb
Continuing with this trend of substantial brand power, Airbnb (ABNB +0.68%) ranks 19th on Comparably's Top Brands for Millennials list and generated $1.6 billion in free cash flow over the last year. Despite posting record revenue of $2.2 billion during the third quarter, the company has seen its stock slide to roughly 35% below 52-week highs set in February 2021.
While the combination of high free cash flow generation, record revenue, and strong branding make today's discounted price look especially appealing for investors, the best may still be on the horizon for Airbnb.
As workplace flexibility becomes increasingly important, Airbnb is beautifully positioned to benefit from more nomadic and adventurous lifestyles. Whether it's working from "home" on a multi-month stay or getting a little bit of work done while on vacation if needed, the company offers undeniable flexibility that is important to younger workers.
Speaking to this point, 20% of Airbnb's gross nights booked in Q3 came from stays of 28 days or more, which grew from just 14% two years prior.
As these long-term stays continue to expand, Airbnb could lock in more predictable (and less seasonal) revenue as the company continues to mature.
Ultimately, Airbnb has become the go-to option for short-term stays of any kind but is also quickly becoming a force to be reckoned with in extended stays. With a market capitalization of roughly $100 billion, Airbnb may sound expensive, but its strong free cash flow generation and 47% sales growth year over year for the trailing 12 months make it a prime candidate for growth at a discounted price.
3. Etsy
Down nearly 52% from 52-week highs set in November, personalized e-commerce platform Etsy's (ETSY +0.56%) stock now offers a promising blend of high revenue growth, free cash flow generation, and a reasonable valuation.
ETSY Price to Free Cash Flow data by YCharts
Over the trailing 12 months, Etsy's sales have grown by 62% year over year, making the fact that it only trades at 38 times free cash flow incredibly appealing. Any time revenue growth rates outpace a company's price-to-free cash flow it catches my attention, as it highlights growth at a potentially reasonable valuation.
Furthermore, Etsy generates $0.26 in free cash flow for every dollar in sales it makes -- making it a true cash machine, despite largely still being in growth mode.
Operating through its house of brands -- Etsy, Reverb, Depop, and Elo7 -- the company continues to expand both internationally and to new generations of users. Looking at Brazilian-based Elo7 specifically, Etsy has a tremendous growth runway ahead as the Latin American country expects to see its e-commerce market grow to $50 billion by 2025, nearly double its current total.
Riding the broad megatrend of global e-commerce expansion, while having a moat derived from its unique personalized products, makes Etsy a one-of-a-kind stock. Trading at the same valuation as it did just a year ago, despite becoming a much stronger company over that year, Etsy looks to be a great stock to consider at today's prices.
