After back-to-back years of strong returns for the broader stock market in 2020 and 2021, the new year is off to a rocky start. Investors are growing increasingly nervous about the potential for a less accommodative monetary policy than they expected, which is forcing them to rethink the prices they'll pay for high-growth stocks.
So far, it looks like 2022 might be a year where stock pickers shine brightest. Being selective is key; here's why three Motley Fool contributors have placed GoPro (GPRO -2.86%), Coinbase Global (COIN -3.24%), and Apple (AAPL -1.22%) at the top of their respective lists.
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A turnaround for the ages
Anthony Di Pizio (GoPro): Action camera industry-leader GoPro is no stranger to stock market turmoil. The company listed in 2014, and after quickly reaching an all-time high price of $93.85, it has since declined by 91%. GoPro struggled to break free from its one-dimensional business model that involved making camera hardware, and not much else.
But in a remarkable turnaround, the company has found new revenue streams, and three major Wall Street analyst firms have upgraded its stock. GoPro is out-innovating the competition once again, with its new HERO10 Black camera shooting video in 5.3K high definition -- and it does so at a price of just $499, with the nearest competitor of similar capability coming in at $3,500.
The key to GoPro's recent success is a higher gross profit margin, and it has achieved this in two ways. First, it's leveraging its website to sell cameras and accessories directly to consumers, cutting some retailers out of the equation and allowing GoPro to pocket more of the profits. The direct-to-consumer channel now represents 35% of the company's sales. Second, it has built a new subscription business for brand loyalists, where they can unlock exclusive product discounts, unlimited cloud storage for videos, and even the ability to livestream directly from their GoPro.
The company had 1.34 million subscribers as of the recent third quarter of 2021, 168% more than the same period in 2020. When it reports its fourth-quarter 2021 result, it expects the subscriber figure to come in at 1.7 million, and it anticipates full-year 2022 subscription revenue of $90 million.
The result is a renewed, profitable GoPro that analysts expect will generate $0.95 in earnings per share during 2022. That places the stock at a forward price-to-earnings multiple of just 8.7; for context, the forward multiple of the Nasdaq-100 index is 22, so GoPro stock would have to more than double to trade in line with the broader market.
Since Wall Street investment bank J.P. Morgan has a $15 price target on GoPro, representing 80% upside from here, it might be a great addition to your portfolio in a stock picker's market.
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A crypto powerhouse
Jamie Louko (Coinbase): So many stocks have been hammered in the first month of 2022, including broader market indexes. The SPDR S&P 500 ETF is down almost 10% this month and the Nasdaq Composite is down over 16%. With so many stocks down immensely from their highs, it might be a time to look for stocks trading at major bargains today, and Coinbase could be the biggest value out there.
Coinbase is the leading cryptocurrency platform for investors and traders alike. With over 73 million users trading over $327 billion in the last quarter alone, Coinbase is one of the few companies in the cryptocurrency space that has scaled up its platform enough to create a stable and recognizable brand name.
As a result, the company is one of the first places investors go when they are looking to buy, sell, or send cryptocurrency, and this has resulted in immense growth for the company. In the third quarter of 2021, Coinbase saw revenue grow 330% year over year, and the company became a cash-generating machine. In the first nine months of 2021, Coinbase generated $7.7 billion in free cash flow -- driven by the major acceleration of assets flooding onto the platform. If the company remains a leader in the space and customers continue joining the platform, Coinbase could continue seeing major cash flow growth.
2020 and 2021 were major years for cryptocurrency and Coinbase was a beneficiary of that. However, that could mean slower growth going into the future. If consumers slow down their trading usage or user growth does not continue, the company could see declining revenue growth and adoption. Coinbase has already seen this slowing growth: In the second quarter of 2021, the company brought in $2 billion in revenue, much higher compared to Q3 revenue of $1.2 billion.
Coinbase has fallen 47% off its all-time highs, bringing the valuation for the stock down to just 17 times earnings and 4.2 times free cash flow. These prices are a steal for a company growing at such rapid rates. The company is the leading platform, and especially when it comes to non-crypto experts, it may be the only platform that comes to mind when investors consider investing in crypto. This brand recognition could allow the company to continue growing rapidly and remain a financially resilient business, making it a top stock on my watch list for the coming year.
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The world's most valuable brand
Trevor Jennewine (Apple): Over the years, Apple has captivated consumers with its sleek devices, cultivating an incredible brand image in the process. But the company is more than trendy products. Its iOS operating system strategically reinforces its brand authority, creating an ecosystem that's hard to replicate. Unlike Android, iOS is closed-source, meaning third-party manufacturers cannot integrate the software into their own devices to provide an Apple-like experience at a lower price point. That gives Apple significant pricing power and a great degree of control over its ecosystem.
To that end, Apple's lineup of trendy devices -- iPhones, iPad, Macs, and various wearables -- creates two opportunities for monetization. The first is by selling the devices themselves, and the second comes from providing services to those devices. That comprises payments services like Apple Pay, cloud services like iCloud, and App Store purchases, which itself includes subscription services like Apple Fitness+, Apple TV+, and Apple Arcade.
Despite supply chain headwinds, Apple delivered strong growth on both sides of its business in the most recent quarter. Product revenue jumped 9% to $104.4 billion, led by record iPhone sales of $71.6 billion. In fact, during the latest quarter, the iPhone accounted for the top five smartphone models in the U.S. and Australia, the top four models in urban China, the top three models in the U.K., and three of the top four models in France and Germany.
Additionally, services revenue grew 24% to $19.5 billion, due primarily to strong App Store sales. That's encouraging, because the gross margin on services was 72.4% in the quarter, significantly higher than 38.4% gross margin on products. As Apple's services business continues to grow, the company should become increasingly profitable.
On that note, despite its $2.8 trillion market cap, Apple is well positioned to create wealth for shareholders. Its tremendous brand authority should fuel consumer demand and its expanding services business should help the company better monetize its installed user base. Moreover, with Wall Street feeling skittish about unprofitable growth stocks, now looks like a good time to add Apple to your portfolio -- a company that generated $93 billion in free cash flow over the past year.
As a final thought, Wall Street's current temperament doesn't mean investors should avoid (or sell) shares of high-quality businesses, even if they are unprofitable. Eventually, those beaten-down growth stocks will come back into favor.
