If you're a high-growth company reinvesting all your profits into your expansion, your stock is probably down significantly today. Investors and the financial media are largely telling people to sell these types of stocks to focus on companies that make profits, trade at lower multiples, and return money to shareholders.
Yes, as interest rates rise, profits further out in the future become less valuable. But long-term rates haven't moved that much, and many young growth stocks are down 50% to 75% from their highs... or even more! For those with a long-term time horizon, now may actually be a good time to look at the very stocks everyone else is throwing away.
Keep in mind, newer companies are still much riskier than consumer staples or large-cap FAANG stocks, so make sure to size these positions appropriately for your risk tolerance. Having said that, here are two such names I just bought early last week, with an eye on the long term.
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Marqeta
Marqeta (MQ -2.72%) went public last June and is a stock I owned already, albeit in very small amounts. However, I greatly increased the position last week.
Marqeta raised $1.2 billion at $27 in its June 2021 IPO, good for a $15.2 billion valuation. Fast-forward to today, and Marqeta is trading just over $10 with a market cap of $5.7 billion. When you subtract out about $1.6 billion or so in cash and marketable securities on its balance sheet, Marqeta's enterprise value (EV) is down around $4.1 billion.
That EV figure is about 6.2 times 2022 estimated revenues, which would be considered cheap by recent standards, though perhaps not those used at the moment. Marqeta is still unprofitable, but a lot of that is stock-based compensation. The company is operating close to breakeven on a cash flow basis.
Meanwhile, Marqeta seems to have a very bright future, as a first mover in modern card issuing technology. Its open and extensible API platform allows all types of card issuers to customize cards in a flexible, efficient manner.
The applications for Marqeta's technology are vast, and Marqeta has attracted an impressive and diverse set of customers. These include modern fintech platforms like Square, buy-now-pay-later companies like Affirm, delivery companies such as DoorDash, crypto-based financial institutions like Coinbase, and even legacy financial institutions looking to create digital and modern solutions, such as Goldman Sachs.
With so many varied top-notch companies choosing Marqeta's technology, it seems there's something differentiated about Marqeta's platform. Meanwhile, Marqeta's total payments volume last year amounted to less than 1% of the $6.7 trillion in payments that flowed through U.S. issuers that year. And globally, the addressable market is $30 trillion.
Meanwhile, Marqeta is spending big to cement its advantage and capture that opportunity. The company just certified its platform in Singapore, Philippines, and Thailand to start 2022, giving it an initial foothold in the Asia-Pacific region. Marqeta's growth potential seems as big as ever, and I think it's market cap will eventually get back into the double-digit billions in the next few years, even with higher interest rates.
Skillz
I've written favorably about esports platform Skillz (SKLZ -1.27%) for the past couple of months, ever since CEO Andrew Paradise bought $5 million in stock as the company swooned in November. That was at an average price of $11.50. Well, you can get Skillz stock for under $5 today. Skillz's $1.76 billion market cap is only around 3.2 times this year's expected revenue. Not only that, but as of last quarter, the company had $540 million in cash on the balance sheet and no debt.
Despite that impressive cash hoard, Skillz just raised another $300 million in debt at the end of December, which management says "increases the Company's financial flexibility to take advantage of strategic opportunities." So it appears management is staying aggressive on its growth plans.
Skillz, which went public via a SPAC in December 2020, operates a platform that allows gamers to play against each other for money, of which Skillz takes a mid-teens take rate. With developers producing the gaming content and users putting up their money to compete in one-on-one and in tournaments, Skillz is a two-sided platform with high gross margins over 90%.
So why did Skillz generate an operating loss of $81.6 million last quarter, which is what has investors so worried?
Fortunately, the picture looks a bit better-than-feared. Skillz is spending a lot of money -- more than revenue, in fact -- on sales and marketing to promote its platform and the new games coming to it. However, on the bright side, sales and marketing grew 56% last quarter, slower than the 70% revenue growth Skillz saw, as it launched the popular arcade game Big Buck Hunter on the platform. So sales and marketing spend as a percentage of revenue came down. Research and development surged 201%, much faster than revenue. However, R&D supports investments in future growth, and is almost like capital spending for technology companies.
Skillz has also made some recent investments that should pay off in the fourth quarter and going forward. The company closed on its acquisition of Aarki, a demand-side digital advertising platform, in the third quarter. Not only should that help lower advertising costs for Skillz, but Skillz will also begin to use Aarki's technology to show ads to its non-paying users, giving it a whole new revenue stream.
New games, technologies, and expanding to new international markets -- the company just launched a pilot in India -- should bring Skillz lots of growth going forward. While the company's current losses are giving investors heartburn, and risks are still there, I think Skillz still has the balance sheet to weather this period and the growth opportunity to make it a potential multi-bagger stock from these low levels.
