Tech stocks have practically gone straight down since peaking last November. This sell-off was warranted because of high valuations. However, too many investors have pressed the sell button on their portfolios without understanding the businesses behind the stocks.
Three stocks with the potential to triple simply by returning to their all-time highs are Shopify (SHOP 0.95%), Twilio (TWLO 1.32%), and PayPal Holdings (PYPL 2.18%).
SHOP data by YCharts.
While positions initiated at the top could be seriously in the red, adding at these lows could supercharge your investment returns over the long term. I believe each of these companies has the potential to surpass its previous all-time high over the next five years, beating the market along the way.
1. Shopify
Shopify provides the tools necessary to sell products online, including a website and credit card processing. Customers can have all this for just $29 per month, but they can unlock more functions and better pricing terms (like lower transaction fees and shipping costs) at higher tiers. After multiple businesses launched an online wing during the pandemic, many investors assumed growth for Shopify was over.
But they were wrong. If Shopify only made money from the monthly subscription fees paid by its users, then that argument might hold some water. However, 71% of Shopify's 2021 revenue came from its merchant solutions segment, which generates revenue from each sale conducted on the platform. This segment was up 62% year over year primarily due to gross merchandise volume rising to $175.4 billion, up 47% year over year.
In 2022, management expects revenue growth to be slower than in 2021 but still faster than e-commerce as an industry. This guidance freaked investors out and triggered a massive sell-off, causing Shopify's price-to-sales (P/S) ratio to fall to 12. The last time Shopify hit such a low valuation was at the beginning of 2017.
Image source: Getty Images.
Although valuation by itself isn't a great reason to buy a stock, it adds to Shopify's compelling investment thesis. In the future, business results will drive the stock as valuation is less of a concern, which should propel Shopify's stock in the coming years.
2. Twilio
Writing the code necessary to send automated text messages triggered by service inquiries or appointment reminders isn't easy by itself. But with Twilio's APIs (application program interfaces), even those with little coding experience can accomplish this task.
Twilio uses a pay-as-you-go system, so any company could quickly taper its usage to cut costs. However, in 2021, Twilio achieved a 131% net expansion rate, meaning customers spent $1.31 for every $1 they spent in 2020. Communicating with customers through text messages or email has become a standard business practice, and Twilio has benefited.
The company has made multiple acquisitions in its quest to become the go-to solution for all customer communication avenues. While this can skew overall revenue, management also provides figures for organic revenue growth, which excludes revenue from all acquisitions made after Nov. 1, 2020. In 2021, organic revenue grew 42% year over year, meeting CEO Jeff Lawson's guidance of at least 30% organic growth for four years starting in 2021.
Similar to Shopify, Twilio's P/S ratio has fallen significantly, and it now sits at 7.5 times sales, a point not reached since 2017. If Twilio can deliver on its promise to grow organic revenue by at least 30% through 2024, which would more than double its revenue, the stock will be a fantastic investment.
3. PayPal
PayPal is all about digital payments, whether it's through its flagship app or other brands like Venmo, Honey, or Zettle. Many consumers switched to digital payments during the pandemic to avoid physical contact. They also discovered the convenience of digital payments, as consumers don't need to carry around their entire credit card arsenal when it is all stored on a single app.
Image source: Getty Images.
None of this matters to the market. PayPal currently trades for less than $90; it last traded this low at the pandemic bottom and in late 2018 before that. This is its actual price, not its valuation. PayPal's current price-to-earnings ratio sits at 24; it has never traded below 30 in its six years as a public company.
PayPal will have several one-time headwinds affecting its 2022 earnings causing growth to be flat. However, its revenue is still expected to grow by around 16%. It might not take over the payments world, like the valuation indicated in 2021, but it remains a solid company.
All three companies got ahead of themselves in 2021 but didn't deserve to be sold off as heavily as they have been. Earnings season is right around the corner, and I believe each will report a solid quarter. I don't know if the results will be strong enough to shift sentiment entirely, but it will likely reveal that many investors have been too pessimistic about these stocks.
