Time and patience are your friends in the stock market. If you save $500 per month and invest in growing companies, it is possible to double your money every five years. That is the same as earning 15% per year on your savings, which is a lot better than keeping your money in the bank earning practically nothing.
If you've needed to communicate with fellow office workers during the pandemic, you are probably familiar with Zoom Video Communications (ZM 1.46%). Etsy (ETSY -0.22%) is another promising growth stock that is showing signs of becoming a force to reckon with in e-commerce. Here's why I would bet on these two growth stocks right now.
Image source: Getty Images.
1. Zoom Video Communications
Share prices of Zoom are down about 80% from their all-time high. That huge drop might lend to a perception that the company is struggling, but that's not the case. The company was on fire during the pandemic. That led to a massive run-up in the stock price. At one point, investors were valuing Zoom at over 100 times annual sales.
In the first quarter of 2021, Zoom reported revenue growth of 191% year over year. The market sometimes extrapolates recent results way out into the future, and that can lead to overvaluation for fast-growing companies. As Zoom's revenue growth came back down to earth, investors had to rethink their long-term growth expectations for the company.
Zoom is still growing. Revenue increased by 21% year over year in the fourth quarter. While management's outlook for the current year calls for growth to slow to approximately 11%, the stock's valuation is also cheaper. At a price-to-earnings (P/E) ratio of 26, Zoom doesn't have to grow at high rates to justify an investment at the current stock price.
The market for digital video is estimated at $18 billion. Zoom is a leader in this race and continues to invest in new features to capture a large piece of the pie. It recently announced a new partnership to integrate DocuSign's technology into the platform to allow users to review documents during a Zoom meeting. Analysts expect Zoom to grow earnings at an annualized rate of 13% over the next five years. If the stock is still trading at its current P/E in five years, investors could double their money off these lows.
Image source: Getty Images.
2. Etsy
Etsy's stock price is down about 60% from its recent highs. This is a great opportunity to add shares of one of the most promising young e-commerce companies in the market.
While many retailers are struggling with limited supply and inflationary costs, Etsy is largely immune to these headwinds. Etsy relies on a growing number of active sellers -- 5.3 million at the end of 2021 -- to list merchandise and generate sales. Etsy makes money by charging a transaction fee on each sale, currently 6.5%. It's constantly looking for ways to improve the shopping experience. Management has focused on things like delivering smarter search results and introducing ways for sellers to engage with their customers through videos. Etsy's performance in 2021 suggests its efforts have worked to drive more engagement from existing buyers.
In 2021, Etsy grew gross merchandise sales by nearly 30% over 2020. The company reported that 53% of all active buyers were repeat buyers in 2021.
"We believe that Etsy offers the world a true alternative to commoditize shopping, that buyers and sellers value this alternative, and we are in the early days of expanding our share of wallet," CEO Josh Silverman said during the fourth-quarter earnings call.
While the stock might be volatile in the near term, Etsy isn't going anywhere, as Silverman noted. E-commerce is a wide-open opportunity, and Etsy has an advantage with its focus on specialty merchandise. If Etsy can generate just half of the 39% annualized earnings growth analysts are currently projecting, the stock could double by 2027.
