Investors often mistake a falling stock with a struggling business, but that is not always the case. The best investors in the world focus first on the business and then decide if the stock is worth buying, regardless of how the share price is performing in the near term.
So when stocks of growing companies suddenly fall, it can pay huge dividends to understand what the market doesn't like. If the stock is down for reasons that don't have any impact on a company's ability to grow over the long term, you might have found a stock that is poised to shoot higher at some point.
With that in mind, here are three stocks that have fallen sharply this year that could deliver nice returns over the next five years and more.
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1. Etsy
Shares of Etsy (ETSY -0.51%) have cooled off over the last year due to slowing growth. The business was on fire during 2020 when e-commerce growth was accelerating due to the COVID-19 lockdowns. Etsy entered 2021 with revenue growth clocking in at 141% year over year in the first quarter. As the economy reopened, that figure decelerated to just 16% by the fourth quarter.
Analysts expect the company to increase revenue 19% in 2022, a far more sustainable level of growth. Etsy still has a tremendous amount of room to run in the global e-commerce market. Last year, it acquired the popular fashion marketplace Depop for $1.6 billion. This deal positions Etsy to tackle the growing secondhand clothing market, which is expected to double to $77 billion in the U.S. by 2025.
The stock price has fallen 50% over the last year, but that also means the shares' underlying value is more attractive. A year ago, the stock traded at a high price-to-earnings ratio of 60, but now it trades for 32 times trailing earnings. In other words, investors are potentially getting nearly twice as much value for each share as they did 12 months ago. That's an attractive offer for this top e-commerce stock.
2. Wayfair
Wayfair (W -1.28%) stock is down for the same reasons as Etsy's. Revenue growth decelerated sharply over the last year, but that is giving investors a good opportunity to buy at a discount.
In the fourth quarter, Wayfair reported an 11% year-over-year decline on its top line, but the company is in a stronger position now than it was in before the pandemic. It generated 51% more revenue in 2021 than it did in 2019, reaching a total of $13.7 billion last year. Even at that size, Wayfair only commands a tiny fraction of the $800 billion home goods market.
"While consumer behavior has changed repeatedly throughout the pandemic, the primary elements for success in our category have not -- the home remains top of mind, and secular trends favor a long and durable shift to e-commerce," CEO Niraj Shah said in the fourth-quarter earnings report.
While overall revenue was down in 2021, it is encouraging that Wayfair generated more than 75% of its order volume from repeat customers, and customers spent 11% more per order, on average than in 2020. Those are healthy trends that suggest Wayfair is still on track to win over more customers and gain market share in this massive industry.
3. FuboTV
FuboTV (FUBO -1.47%) is a different case than Etsy and Wayfair. The live-TV streaming service has delivered high-octane results. It reported revenue growth of 144% to $638 million in 2021. Investors, however, are getting impatient with the company's lack of profitability.
Acquiring broadcast rights is expensive, which explains why Fubo reported a loss of $383 million in 2021. But the company is seeking out other ways to monetize users, including sports betting and advertising. Fubo's new Sportsbook service could lift screen time and, therefore, fuel advertising revenue, which grew 153% in 2021. The ultimate benefit is that ad revenue generates a higher contribution margin than subscription revenue and gives FuboTV a path to profitability.
All said, investors might be underestimating Fubo's ability to generate a profit. The stock currently trades at a low price-to-sales ratio of 1.1, which is much lower than Netflix's sales multiple of 5.2. But Fubo's valuation could settle somewhere in between those numbers over the long term, and that is all investors need to realize a substantial return on investment from these levels.
