The bear market of 2022 hammered the tech sector. The Nasdaq lost almost 30% of its value during the year, and a few tech stocks fell by more than 75%.
Nonetheless, the severity of that downturn and a slowing of interest rate increases could renew interest in tech stocks in 2023. With that possibility, investors could see outsize gains in Apple (AAPL -0.66%), Airbnb (ABNB 0.90%), and Sea Limited (SE 2.18%).
An incredible return on equity is yet another reason to own this American giant
Jake Lerch (Apple): With the end of the year drawing near, it's time to think about the future. Specifically, what stocks are worth owning and why. For me, one stock that remains a must-own going into 2023 is Apple.
The list of reasons to own Apple is long, but let's start with this: Apple's return on equity (ROE) is a staggering 175%. Meanwhile, the average ROE in 2021 for companies in the S&P 500 was 21.9%.
In short, return on equity measures management effectiveness. It answers the question, "How successful is a company's management team at creating profit with the equity provided by shareholders?"
Apple, starting with Steve Jobs and continuing under Tim Cook, has excelled at delivering magnificent ROE. Over the last 20 years, Apple's average ROE is an astounding 43% -- with a significant outperformance since 2020.
But can the good times continue for Apple? I think they will. Not only are the company's iPhones great, but many people have grown up with them and developed strong brand loyalty in the process. It's hard to imagine a competitor seriously threatening Apple's smartphone market share anytime soon.
What's more, the company generates billions from the sale of its iPads, Mac computers, accessories, and services. It's just another reason why Apple is the largest American company today, with a market cap of over $2.3 trillion.
Despite all these positives, Apple hasn't been immune from this year's bear market. Shares are down 15% year to date. Smart investors should recognize that for the gift it is and scoop up shares today -- before they bounce back.
The travel revolution has only just begun
Justin Pope (Airbnb): Travel hasn't been the same since Airbnb rose to mainstream recognition; in fact, you might know someone who refers to any short-term rental property as an Airbnb -- the brand has become associated with the product. Airbnb is a platform where property owners can rent out their lodgings for travelers to book through Airbnb's website or app.
The company's financial performance remains strong; revenue grew 29% year over year in the third quarter and has totaled $8 billion over the past four quarters. Airbnb is a digital platform, which makes the business very profitable; it's converted $3.2 billion of that trailing 12-month revenue, or 40%, into free cash flow. That's cash profits for share repurchases or adding to its existing $9.6 billion cash position.
Airbnb's guests booked 99.7 million nights and experiences in the third quarter, a 25% increase from the prior year; that's a lot, but there is room for that number to grow over the coming years. Consider that Airbnb is a global company operating in North America, Europe, the Middle East, and the Asia-Pacific region. Airbnb can grow from several factors, including vacation rentals taking share from traditional lodgings like hotels, and the global population becoming more mobile. Active listings increased 15% year over year in Q3; investors should track how lodging supply grows over the coming years, as it could signal the direction of Airbnb's bookings growth.
The stock has fallen 49% from its high and trades at a price-to-sales (P/S) ratio of 8. That's a big difference from the P/S of more than 30 it commanded last year. The stock is even cheaper than it sounds because its $9.6 billion cash position represents a whopping 15% of the company's $63 billion market cap. Analysts believe Airbnb's revenue will grow by 10% or more annually for several years. Then you consider the company's high free cash flow conversion rate (40% is excellent), and it seems that long-term investors looking for a winner next year and beyond could do very well with Airbnb.
The Southeast Asian juggernaut that could seem unlimited
Will Healy (Sea Limited): Sea Limited has emerged as one of the more prominent companies in gaming, e-commerce, and fintech. The Singapore-based conglomerate began as its gaming subsidiary Garena, which has become best known for its battle royale game Free Fire.
It has also ventured into e-commerce with Shopee. In time, it became the No. 1 shopping app in Southeast Asia. Now, Shopee has ventured into Latin American and European markets, a move that should raise Sea's profile.
Also, like its peer in Latin America, MercadoLibre, it also operates a growing fintech segment called Sea Money. It offers payment, financing, and digital banking services. Since many of its markets primarily use cash, Sea Money adds synergies to Shopee and Garena.
Now, Sea's financials are giving investors a reason to take a second look at the stock. Investors reacted positively to its Q3 report as the company reported revenue of $3.2 billion, a 17% increase year over year.
Moreover, e-commerce, which made up about 59% of Q3 revenue, increased by 32%. That compares well to Amazon, which experienced shrinking e-commerce revenue outside of North America in its latest quarter. Digital financial services, which claims around 10% of revenue, logged 147% revenue growth over the last year. This indicates fintech will become a huge growth driver for Sea stock.
Still, Sea faces some concerns. In Q3, the company did not provide payment volume figures, something it included in the second-quarter report. That may mean Sea Money is not prospering to the extent a 147% revenue growth rate would indicate. Additionally, digital entertainment, which is Sea's gaming segment, experienced a revenue decline of 1% year over year. An emergence out of lockdown may explain that lower usage.
But despite those minor disappointments, investors reacted well to the earnings news. Sea stock surged 36% higher in the next trading session.
That spike may serve as a catalyst for a stock that is still comparatively inexpensive. The internet company's stock has fallen by more than 70% over the previous 12 months. And while its valuation has come off record lows, the sales multiple of around three makes it significantly cheaper than MercadoLibre at a P/S ratio of 5. Such a valuation and Sea's rapid growth could prompt investors to buy more Sea Limited despite its post-earnings surge.