It's very difficult to pick stocks that will double in value within one year. But it's not that difficult to pick stocks that can double in, say, five years. A 100% return over five years equates to a compound annual return of 15% per year. If you invest $500 per month at 15% per year over 30 years, you will have $3.4 million. The best way to do this is to look for growing companies that are selling at modest valuations.
The market sell-off has brought valuations of industry-leading companies down to conservative levels. I believe chances are very good that a $250 investment split between Meta Platforms (META -0.52%) and Corsair Gaming (CRSR -0.64%) could turn into a combined $1,000 in five years. Here's what you need to know.
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Meta Platforms
Meta stock is down 36% year to date after missing earnings estimates in its fourth-quarter report. Apple's recent privacy changes to iOS have made it more difficult for Facebook to deliver ad impressions and grow revenue at the rate investors expect. Moreover, management blamed competition with other social media platforms, most notably short-form video content on TikTok, for headwinds in user engagement.
To respond, Meta is investing in Reels to deliver the short-form video that more users demand these days. Shifting its investment strategy to deliver features that drive higher engagement over time is something Facebook has had success with in the past. "I'm confident that leaning harder into these trends is the right short-term trade-off to make in order to get long-term gains," CEO Mark Zuckerberg said. "We've made these types of transitions before with mobile feed and Stories, where we took on headwinds in the near term to align with important trends over the long term."
With over 2.8 billion people engaging with its family of apps, including Instagram and WhatsApp, it's a good bet that Zuckerberg & Co. will figure out ways to keep delivering growth. Meanwhile, the market is undervaluing Meta's tremendous free cash flow, which totaled $39 billion in 2021. This is fueling investments in new growth initiatives that could pay off big over the long term across artificial intelligence, the metaverse, in-app commerce, and business messaging tools -- all areas where management is focused on investing in 2022.
This top tech stock trades at a very modest price-to-earnings (P/E) ratio of 15.7, which is well below the S&P 500 average P/E of 24. The stock could almost double if the market gives Meta a similar P/E as the index. With further growth in earnings to increase the E in the P/E multiple, investors could be looking at an easy double over the next three to five years.
Corsair Gaming
Anyone who plays video games is familiar with the Corsair brand. It's a premium maker of keyboards, mice, headsets, and other products for gamers, streamers, and content creators. Since its founding in 1994, the company has shipped over 237 million products. It produced record revenue in 2021, reaching $1.9 billion for a year-over-year increase of nearly 12%.
This performance is solid, coming off a record year in 2020 when stay-at-home gamers were busy upgrading their gear. While supply chain shortages caused Corsair's revenue to flatten out in the second half of 2021, there is still tremendous pent-up demand waiting on the sidelines. The graphics card shortage from Nvidia and Advanced Micro Devices has kept many gamers from being able to upgrade their gaming PCs, which impacts sales of Corsair's products such as power supplies and memory modules that are sometimes bought in conjunction with a new GPU. The market seems to be overlooking the potential for an easing of supply shortages in graphics cards to help funnel more sales for Corsair's PC products. AMD expects supply to improve as the year progresses.
Market participants lumped Corsair Gaming in with other pandemic plays, so as the economy reopened, the stock fell sharply last year. But Corsair is still positioned to deliver solid growth over the long term. There are 24 million PC gaming enthusiasts, with an estimated 1.4 billion people who play games casually. This gives Corsair a long runway to continue reaching new customers for many years. The industry is competitive, but Corsair has been around for more than 20 years and commands a top market-share position across many of its products.
The stock trades at a P/E of 13.5 based on this year's consensus earnings estimate. Like Meta, it won't take much growth to justify a higher valuation, making Corsair a good candidate for a double in three to five years.
