3 Top Buys for November

With just two months left in the year, many investors are ready to slam the book of 2022 shut. However, I think investors need to be patient, as there are still several companies trading for bargain valuations that could still see some movement before 2023 arrives.

Three that I think are top buys in November are Twilio (TWLO 1.47%), MercadoLibre (MELI 3.09%), and Adobe (ADBE 0.87%). All three have had an atrocious 2022, but their businesses are still intact, and their stocks are a coiled spring waiting to be released.

Twilio

Twilio's software helps power communication between its clients and their customers. Its APIs (application program interfaces) make programming automatic text messages, call centers, or setting up video calls easy, as little coding is required.

Despite Twilio's stock falling 84% this year, its business hasn't skipped a beat. In the third quarter, Twilio's organic revenue (which excludes revenue from acquisitions made in the past 12 months) rose 32% YOY (year over year). For Q4, revenue growth will slow to about 18% to 19%, which reflects the worsening economic environment.

While Twilio hasn't produced profits, CEO and co-founder Jeff Lawson projects the company will reach non-GAAP operating profitability next year. Q4 is a closer step to that goal, with non-GAAP operating profits projected to come in at a $5 to $15 million loss.

However, many investors took issue with Twilio's Q4 guidance, and the stock dropped over 30% the day after. But that reaction is extremely short-sighted. First, 18% to 19% growth isn't anything to be extremely disappointed in, even if it is less than expected. Also, Twilio is still signing large deals, including its second quarter in a row with an eight-figure deal. The long-term trends are still in Twilio's favor, even if the rapid growth takes a break for a year or two.

But with the stock trading for a meager 2.2 times sales, Twilio is a bargain buy, especially when its future growth is factored in. After all, 2.26 times sales is the level that a low-gross margin commerce company like Amazon trades at, not a high-margin software business. It could be a tough ride for Twilio shareholders in the short term, but I remain confident in Twilio's long-term opportunity.

MercadoLibre

Switching to e-commerce, MercadoLibre is the top e-commerce company in 18 countries throughout Latin America. Along with its e-commerce platform, it also has a logistics division, digital payments division, and a consumer credit division that touches nearly every corner of the commerce ecosystem.

MercadoLibre's stock has fared much better than Twilio, as it's only down about 30% this year. However, its price-to-sales valuation currently sits at 5.3, the company's lowest since the depths of the Great Recession in 2009.

But looking at the business, you'd have no reason to think the company should be as cheap as it was during one of the most perilous financial crises in recent history. In Q3, revenue was up 61% to $2.7 billion, with specific strength in its fintech division as revenue rose 115% YOY to $1.2 billion. MercadoLibre also posted a profit margin of 4.8%, indicating the business is maturing.

MercadoLibre's Q3 earnings left little to be desired. The company's growth is accelerating, yet the stock is seemingly priced for failure, and this disconnect may not last for long.

Adobe

Unlike the other two, Adobe's stock trouble is more self-inflicted. On Sept. 15, Adobe announced its intent to acquire the collaborative design platform Figma for $20 billion, valuing the company at 50 times sales. Prior to the acquisition, Adobe was only down about 30% for the year. Now, it's down around 46% for the year. 

In turn, Adobe's price-to-free-cash-flow ratio has plummeted to 21 times free cash flow -- the lowest it has been since Adobe switched to a software-as-a-service (SaaS) business model. The business is also performing well -- it posted revenue growth of 13% to $4.43 billion in its Q3 for fiscal year 2023 (ending Sept. 2), a new quarterly record. Guidance for Q4 wasn't bad either, with management expecting about a 10% growth in revenue.

Adobe acquired a real threat to its business in Figma and also gained some impressive collaborative technology that could benefit other Adobe products. While the price tag was high, the long-term benefits of the acquisition will outweigh the short-term pitfalls.

I'm bullish on all three of these companies because of their solid businesses but negative short-term sentiment. I believe both Twilio and MercadoLibre will report stellar earnings on Nov. 3, and their stocks could pop due to their already low valuation. Adobe has rarely been on sale over the past decade, and investors have a prime opportunity to pick up a best-in-class business for a reasonable price.

I'm unsure how long these deals will last, and investors shouldn't wait until 2023 to take a position.