The overall market is down big to start 2022, but growth stocks, or companies that are growing fast but are currently unprofitable, have been hit even worse. Many such names are down 70% to 90% or more in response to high inflation and rising interest rates.
Yet in every crash, there are huge opportunities that can make investors fortunes over the long term. So how do you separate the survivors from the pretenders? In this risky period, investors should focus on four things: competitive advantages, a large growth runway, a reasonable valuation, and a balance sheet that can get the company through this tough period.
Here are two names that fit all four criteria, making them millionaire-maker candidates over the next 10 years.
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Sea Limited has nearly unlimited potential
A darling of the pandemic-era boom, Southeast Asian super-app Sea Limited (SE 2.15%) has seen its shares decimated since November. Beginning as a video game publishing platform for the region, Sea Limited's first self-developed game, Free Fire, went on to become an international smash hit.
Sea then parlayed its gaming profits to launch Shopee, which has gone on to become the leading e-commerce platform across Southeast Asia in just six years. Taking its cue from other successful e-commerce companies, Sea subsequently launched SeaMoney, a digital payments and lending platform that is now taking off in earnest.
Shares are currently down about 75% from their highs -- and this is after a 50% bounce off the near-term low back in April.
Still, Sea checks all four boxes for beaten-down opportunities. Its management team, led by founder and CEO Forrest Li, has shown execution chops not only in gaming but across all three of its segments. After all, Shopee wasn't the first e-commerce platform in Southeast Asia, but Sea's team figured out a way to gain market share and surpass the established leaders. Shopee is now the e-commerce leader in all seven major Southeast Asian countries, despite a wide variety of infrastructure and cultures among them.
Furthermore, Sea's Garena gaming platform publishes a wide variety of games, giving it insights into demand trends and helping it publish hits like Free Fire.
Second, Sea also has a huge growth opportunity ahead of it. Southeast Asia is a rapidly digitizing economy, and the region is set to post healthy GDP growth this decade. That could even exceed expectations if Western companies move manufacturing out of China and into these countries.
But Sea isn't content with just Southeast Asia. After entering Brazil in 2019, management has noted Shopee has gained traction in the country, surpassing the leaders and achieving the highest monthly users for Brazilian e-commerce in March and April.
Sea's recipe appears to be working in Latin America as well, which would effectively double its total addressable market. While Sea has pulled back on its Indian venture, the company has also set up Shopee in Spain and Poland, giving it a foothold in Europe. Needless to say, with room to grow in gaming, e-commerce, and fintech, along with geographic expansion, Sea has perhaps as many growth avenues as any company out there today.
Of course, as the world has emerged from the pandemic, video gaming and e-commerce have predictably decelerated. However, Sea's stock crash seems a bit overdone, since this appears like a bump on the road to further growth.
While Sea is still burning billions in cash on an annualized basis, management was smart enough to raise $6 billion in equity and convertible debt late last year, when the stock was in the $300s. With more than $10 billion in cash now on its balance sheet, it appears Sea can easily make it through the next few years without sacrificing on growth.
Moreover, management has also guided that its loss-making Shopee segment will be positive on an adjusted EBITDA basis (earnings before interest, taxes, depreciation and amortization) before the end of this year in Southeast Asia, although Latin America will still print losses as it grows faster. Meanwhile, management also guided for SeaMoney to be cash flow-positive next year.
Now trading at just 3.9 times sales and 3.3 times this year's projected sales, Sea trades at a value that could make it a huge winner over the next decade, even if this year may be difficult.
Marqeta
Staying within the fintech realm, Marqeta (MQ -2.74%) also fits the four criteria. Marqeta has developed a technology platform of APIs that allow card issuers to securely issue digital cards with very specific and changeable characteristics. In the heavily regulated world of finance and payments, this is no easy feat, given the high bar for compliance and anti-fraud measures.
Marqeta also appears to have some secret sauce as a first mover in technology-based card issuing; it has attracted trendy digital banks, crypto brokerages, and online delivery platforms as clients. But Marqeta isn't just for start-ups; it's also managed to attract the largest and oldest-school banks as well, including Citibank and Goldman Sachs, to power their new business and consumer cards. The ability to attract that range of clients seems to show Marqeta's advantage is for real.
Last quarter, Marqeta grew revenue an impressive 54%, but its platform still accounts for less than 1% of total card volume in the U.S., and much less than that globally. Marqeta has really only recently expanded in Europe and has just launched an expansion into Southeast Asia, where it also has plenty of growth ahead of it.
Meanwhile, the company is flush with about $1.65 billion in cash, after raising money at an attractive valuation one year ago, when growth stocks traded much higher. Although it's posting net losses at the moment, Marqeta only had an adjusted EBITDA loss of $12.8 million last year. So it doesn't burn much cash at all, even as the company invests in hypergrowth.
After the tech sell-off, Marqeta trades at 8.6 times this year's average revenue estimate; however, when stripping out its cash, it's only about 6.3 on an enterprise value-to-sales basis. That's not that expensive if Marqeta can continue to grow at or near these levels. Given its apparent first-mover advantage in digital credit cards and huge growth opportunity, it's a good bet to make investors above-market returns over the next decade.
