The 24% year-to-date drop in the Nasdaq Composite has tested the patience of investors, but it helps to look at the decline from a different perspective. Even after the recent drop, the Nasdaq is still up 86% from five years ago. No one knows when this bear market will finally end, but investors can have confidence that companies with in-demand products and services will grow in value regardless of how their stock performs next month.
If it were my $3,000, I would consider splitting it three ways between Pinterest (PINS -0.52%), Skyworks Solutions (SWKS 1.83%), and Ally Financial (ALLY 0.13%). These stocks have fallen hard with the market, but at these lower share prices, investors have a good chance of turning their total investment into $6,000 within the next eight years. Here's why these stocks have double-bagger potential.
Meta Platforms' Facebook and Snap get a lot of attention on Wall Street, but investors shouldn't overlook Pinterest's large user base of 433 million monthly active users. Pinterest saw a rise in user engagement during the pandemic, but the reopening of the economy and competition with other social media platforms has pressured growth this year. In the most recent quarter, monthly active users fell 5% over the year-ago quarter, with revenue growth dropping to a sluggish 9%. Pinterest is capable of performing better, which is why it's time to consider buying the stock.
Pinterest has a unique proposition to advertisers, which is how the company makes money. People usually have an intent to buy something when using the app, and that differentiates Pinterest from its social media rivals.
The company sees a monster opportunity in e-commerce, and it recently hired digital payments veteran Bill Ready as its new CEO. Ready spent the last decade working in executive roles at PayPal and Alphabet's Google, and was instrumental in helping PayPal expand customer accounts and engagement until leaving for Google. His hiring at Pinterest could be a springboard for the stock.
Pinterest is continuing to invest heavily in machine learning and recommendation systems to guide users down their commerce journey on the platform. Pinterest recently signed a deal with Tastemade, which will bring new Idea Pins, news shows, and other video programming for Pinterest TV. In July, Pinterest acquired The Yes, a leading fashion shopping platform powered by artificial intelligence. These appear to be finishing touches on top of the company's long-term ambitions to leverage its unique user base on the growing e-commerce market.
The stock is likely to be worth far more in 2030 than it is trading for today. While I wouldn't call Pinterest a bargain despite its steep share price drop, its market cap of $16 billion doesn't seem like a lot given the size of the company's user base and the potential under e-commerce expert Bill Ready. Among Twitter, Snap, and Meta, Pinterest has the lowest market cap but could be the most undervalued.
Skyworks Solutions
Skyworks is one of the leading suppliers of chips for several consumer end markets, including 5G smartphones, Internet of Things, and Wi-Fi 6 technology. The stock has tumbled with the broader market but has delivered a 220% cumulative return to investors over the last 10 years.
Even in this difficult year for chip stocks, Skyworks is still performing like a long-term winner. Despite a slowdown in demand across the semiconductor industry, Skyworks continues to report double-digit revenue growth in 2022, and management sees a strong finish to the year.
The adoption of 5G wireless connection speeds has gotten a lot of attention over the last few years. Skyworks is well positioned to benefit from this shift, since it has relationships with all the major smartphone manufacturers. But investors should note Skyworks' reliance on Apple, which could be a risk, given Apple's recent move to design its own processors for iPhones and Macs. Still, customer concentration risk is worth accepting here.
Skyworks is diversifying its business to benefit from the growth of connected devices and wireless technologies across a range of markets. It's currently the No. 3 supplier in the analog chip market, behind Texas Instruments and Analog Devices. But among these competitors, Skyworks reported the fastest revenue growth in 2021.
Revenue grew 10% year over year in the most recent quarter. Moreover, the company raised the quarterly dividend payment by 11% to $0.62 per share, reflecting a strong outlook for demand over the long term.
Market conditions in the chip industry are fluid right now. Investors should be prepared for weaker business trends in the near term, but this is why they can buy the stock really cheap. The stock's current forward price-to-earnings ratio of nine looks like a bargain. If Skyworks returns to its previous valuation of about 18 times expected earnings, which is still a discount to the market average, the stock would double in value.
Ally Financial
Digital banking is another megatrend worth investigating. Mobile has changed how consumers enjoy entertainment and communicate, but mobile banking is still coming along. The mobile banking market is expected to double to $1.3 billion by 2028, according to Vantage Market Research.
Ally Financial is a leading digital banking app that regularly scores high marks with customers. The company prides itself on exceptional customer service and offering a growing range of financial services. Over the last few years, it has seen a notable consumer shift toward digital banking. While profits have come under pressure amid higher non-interest expense and higher provisions for loan losses in a weakening economy, the company continues to generate a high return on tangible equity above 20%.
Management's growth strategy revolves around diversifying into more banking products. Growth in retail deposits, a key driver of growth in other services, increased by 6% year over year in the second quarter. That marked 53 consecutive quarters of retail deposit growth. Meanwhile, Ally Lending experienced a 26% year-over-year increase in gross originations, while Ally's new credit card offering grew 58% over the year-ago quarter. Growth in these areas countered the weakness in Ally's investment service, validating management's diversification strategy.
Long term, management is targeting a return on tangible equity (ROTE) of between 16% to 18%. This should justify a valuation multiple of 1.6 times Ally's tangible book value per share (e.g., 16% ROTE divided by 10% discount rate), but investors can currently buy shares of Ally Financial at just over one time tangible book value. That is a steal for a leading brand in mobile banking that has delivered consistent revenue growth.
Investors could earn a 50% return just by the stock moving up to a fair valuation. Once you factor in future growth of the business and the stock's annual dividend yield of 3.41%, a double by 2030 is money in the bank.
