Adding to stocks that have seen a recent jump in share price can be difficult psychologically. It was just 20% lower one month ago -- you missed it.
Then the stock continues to rise, and a profitable business goes uninvested because a great "buy the dip" opportunity didn't come along.
With this said -- and with the S&P 500 Index up 10% in the last month -- many stocks have investors asking, "Did I miss my chance?"
Probably not -- especially over the long term.
Today three Motley Fool contributors will look at three stocks that explore this idea -- Disney (DIS -0.55%), Figs (FIGS -0.63%), and Airbnb (ABNB 1.03%) -- and explain why they are outstanding long-term holdings despite recent increases.
Disney's momentum and proven pricing power
Bradley Guichard (Disney): Disney has just accomplished something that seemed unheard of only a couple of years back: It's overtaken Netflix in total subscribers. Disney reported 221 million subscribers across its three platforms, Disney+, ESPN+, and Hulu, just edging Netflix's 220.7 million. Even better, Disney has momentum after adding 14.4 million Disney+ subscribers last quarter. This doesn't make Disney the streaming leader yet, but it shows how far the company has come.
The stock has gone on a tear as a result, and has gained 30% over the past 30 days as investors' ears prick up.
Many were ready to abandon the stock because of recession fears, inflation worries, and plummeting consumer sentiment. But the mouse is hard to keep down for long. Revenue grew 26% year over year in the third quarter, while diluted earnings per share rose to $0.77 from $0.50.
When inflation rises, companies with pricing power will come out on top. Disney has proven for decades that people will pay for its unique products even as prices at the parks rise. A trip to a Disney theme park is a rite of passage for many families, and people are flocking back now that COVID-19 has waned. This is why revenue for Disney Parks is up 92% so far this fiscal year, going from $11.1 billion to $21.3 billion.
The Disney Parks segment is also very profitable, boasting a 30% operating margin. This will help the company as it fights the streaming wars. Direct-to-consumer streaming isn't profitable as companies battle it out to gain subscribers. Having another tremendously profitable segment gives Disney a leg up on the competition. Even better, these products are very symbiotic -- one promotes the other. Disney+ will likely boost demand for the parks and vice versa.
Although the stock has been up significantly over the last 30 days, it is still down 31% over the past year, so it deserves strong consideration from long-term investors.
A beloved brand with expansion plans
Josh Kohn-Lindquist (Figs): After spiking above $45 per share shortly after its initial public offering in 2021, shares of direct-to-consumer (DTC) healthcare apparel company Figs saw its shares plummet to single digits in less than a year.
Facing decelerating sales growth and a couple of quarters of underwhelming earnings, Figs saw its premium valuation quickly reeled in by the market.
FIGS PS Ratio data by YCharts.
However, now trading with a price-to-sales (P/S) of only five, Figs is worthy of a second look, despite its roughly 30% rise in share price this last month. One way to put this P/S of five into context is to imagine that if Figs can grow into a profit margin of 10%, it would effectively trade at 50 times earnings.
Considering that two of the company's apparel peers -- Nike and Lululemon -- own 13% and 15% profit margins, this 10% margin for Figs isn't too unreasonable, especially as it matures over time.
While Nike and Lululemon are exponentially larger brands than Figs and much more well established, the young upstart could soon deserve to be mentioned alongside these behemoths, as it already owns a profit margin of 7%.
Furthermore, its net promoter score (NPS) of +80 highlights that it is one of the most beloved apparel brands out there. NPS is scored on a -100 to +100 scale and shows how likely a customer is to recommend a product to others, with a positive score considered good -- making Figs' mark of +80 incredible.
Thanks to its DTC sales, streamlined digital experience, and premium healthcare apparel offerings, Figs completely flipped a forgotten-about and commoditized industry on its head -- creating incredible customer loyalty along the way.
While sales growth slowed to "only" 21% year over year in the second quarter of 2022, Figs grew its active customer base by 26% and saw its average order value increase by 6%. Best yet for investors, management guided for 24% revenue growth for 2022 at the midpoint, signaling an optimistic outlook to close out the year.
As the company eyes two major growth runways in international expansion and lifestyle (non-scrubs) apparel sales -- which only account for 8% and 15% of revenue, respectively -- Figs could rapidly outgrow its compressed valuation and extend its recent run-up in share price. With its lifestyle brand showing 70% sales growth in Q2, Figs could quickly prove to be much more than a scrubs company.
Strong growth backs up the recent stock jump
Jeff Santoro (Airbnb) Year to date, Airbnb's stock is down 24%, losing to the S&P 500 by more than 15%. However, over the past month, the stock is up 30%, easily outpacing the index's 11% gain.
Short-term stock movement should largely be ignored, but it is worth taking a look at recent results to see if the business performance is in line with the market reaction. In the case of Airbnb, the results do back up the recent bull run.
In Q2 2022, reported at the beginning of August, Airbnb's number of nights and experiences booked reached 103.7 million. This was a year-over-year increase of 25%, on top of 197% growth in Q2 2021. Airbnb has seen double- or triple-digit growth in this important metric in every quarter since the beginning of 2021.
Gross booking volume (GBV), which is the total amount of money transacted on the platform, was $17 billion in Q2, a growth of 27% year over year. As with nights and experiences, this growth was following a strong Q2 2021, when GBV increased 320%.
It's important to remember that Airbnb is a two-sided network, which means that when travelers book stays with Airbnb, it benefits the hosts as well as the business. So these user metrics show prospective hosts that there's money to be made by joining Airbnb, thus increasing the available locations.
The increased bookings led to Q2 revenue of $2.1 billion, up 58% from Q2 2021. More importantly, Airbnb took a big step in the direction of profitability, posting net income of $379 million, compared to a net loss of $68 million in Q2 2021. This represented the most profitable second quarter in the company's history. Additionally, over the last 12 months, Airbnb has generated $2.9 billion in free cash flow.
The best news for investors is that even with these strong results, and the recent stock appreciation, Airbnb trades for 11 times sales. While that's not cheap, it's well below the company's average price to sales ratio of 20, and not far from its all-time low of 7.9.
