The stock market might be bottoming out, or it might keep falling to fresh lows. Regardless of what happens in the near term, though, there are plenty of great companies on sale that will survive this period of market mayhem and generate great returns for patient, long-term investors.
When recently asked to name a few such stocks, three Motley Fool contributors picked Netflix (NFLX +1.07%), Chegg (CHGG +0.02%) Lululemon Athletica (LULU 0.61%).
NASDAQ: NFLX
Key Data Points
Unrivaled profits in streaming
John Ballard (Netflix): This has been a rough year for Netflix. The stock is down by almost 70% from its all-time high. The streaming leader reported back-to-back subscriber losses in the first and second quarters, which accelerated the stock's fall from grace on Wall Street. To its credit, management has been open and candid with investors, attributing its problems to the growing adoption of connected-TV platforms and increasing competition from new streaming services, among other issues.
Netflix's high-growth days might be over, so some degree of share price correction was appropriate, but the market might be selling the entertainment service too short. This business remains extremely profitable with an operating profit margin of 19% over the last four quarters. That margin was over 20% last year, but management is putting its resources to work by investing in several areas to improve the service and drive subscriber growth.
It already has an unrivaled content selection with options to suit nearly everyone's tastes, but the successes of major series like Stranger Things, Squid Game, and Ozark suggest Netflix can keep releasing hits frequently to generate interest. And it certainly has the resources to reinvest in movies and shows that will draw in new viewers.
Its soon-to-debut ad-supported subscription tier -- to be priced at a discount to its regular subscriptions -- should be a catalyst for more growth in 2023. Netflix is serious about this offering. It recently tapped Microsoft as its ad-tech partner and plans to launch the new tier in early 2023.
Trading at a price-to-earnings ratio of 22 times expected earnings, Netflix shares are valued at a small premium to the S&P 500. Investing in top brands when expectations for them are low can be a highly rewarding strategy.
NYSE: CHGG
Key Data Points
Chegg has a good chance of bouncing back in 2023
Parkev Tatevosian (Chegg): Sure, there are a few months until the end of 2022, but it might still be worthwhile to prepare your portfolio for 2023 -- and one of my favorite stocks for next year is Chegg. The education technology company experienced challenges in 2022 related to student enrollment. Chegg primarily serves college students worldwide, and unsurprisingly, fewer people wanted to attend courses on campuses during the hotter phases of the pandemic.
Not that COVID-19 will vanish in 2023, but with increasing vaccination rates, new treatments, and a broader adjustment to the virus as a now-endemic (rather than pandemic) threat, it's reasonable to expect more students will return to classrooms next year.
In the meantime, though, that decline in enrollments has brought down Chegg's valuation. It's selling at a price-to-free-cash-flow ratio of 17.8, near its lowest level in the previous five years. That's a bargain price for a business that enjoys a substantial competitive advantage.
Data by YCharts.
Chegg boasts 84 million pieces of proprietary content to help students navigate their courses. Additionally, with their subscriptions, which cost less than $20 per month, students can ask 20 questions a month and get answers from Chegg's subject matter experts. This has been a formula for success. From 2018 through 2021, Chegg's revenue increased from $321 million to $776 million, while its operating income improved from a loss of $6 million to a $78 million profit.
NASDAQ: LULU
Key Data Points
A profitable and growing apparel stock
Jennifer Saibil (Lululemon Athletica): There are few apparel companies performing as well as Lululemon. It designs and sells athletic and athleisure wear, and as those segments continue to take up a large share of closet space in the U.S. and around the world, Lululemon keeps raking in sales.
In its fiscal 2022 second quarter (which ended July 31), sales increased 29% year over year to $1.9 billion. In the international market, revenues increased by an even more impressive 35%. Lululemon achieved its goals of doubling its men's and e-commerce sales and quadrupling its international sales ahead of schedule, and it has set new goals to repeat those feats, which would result in the company doubling its revenue by 2026.
Lululemon has a fairly small product selection that mostly consists of nonseasonal merchandise, although it constantly innovates with fabrics and styles, and launches limited edition collections to pilot new ideas. This gives it several advantages. For example, it does not have to discount seasonal merchandise at the end of a season, and its customers can easily buy styles they already know online without having to try them on. That also helps it avoid returns.
The company's omnichannel network is now an integral part of its business model. Digital sales increased 30% year over year in the fiscal second quarter, while comparable-store sales increased 16%. Digital sales made up 42% of the total, which is a very high percentage in retail.
Profitability was strong as well, despite the fact that nearly every other retailer -- especially in the apparel niche -- is struggling with margin pressure due to rising costs. Operating margin expanded by 1.4 percentage points to 21.5%. Earnings per share rose to $2.26 from $1.59 in the prior-year period. Management is guiding for revenue to increase around 24% in its fiscal third quarter and for EPS to rise about 34%. Those would be impressive results considering the state of the global economy, and if the economy improves in 2023, Lululemon's growth could accelerate as well.
