Much of last year was dominated by a global pandemic, so coming out of 2021, investors couldn't have possibly predicted the challenges that were ahead. Now, just 12 months later, supply chain bottlenecks helped fuel 40-year-high inflation, the highest interest rates in nearly 15 years, and the worst bear market in more than a decade. Sheesh.
As a result of the economic overhang, many former high-flying stocks have fallen on hard times. Yet, for those who view the glass as half full, investors are presented with the rare opportunity to buy these high-quality companies at discounted prices.
When opportunities abound, it can be difficult to separate the wheat from the chaff. To make things easier, let's narrow down the field and look at three businesses that have all the earmarks of a stock ready to run: an industry-leading position, significant secular tailwinds, and a large addressable market.
Image source: Getty Images.
1. Shopify: The death of e-commerce has been greatly exaggerated
After its public debut in mid-2015, Shopify (SHOP -2.82%) quickly rose to prominence as the leading provider of software-as-a-service (SaaS) tools to facilitate digital retail for merchants.
After several years of unbridled growth and lockdown-fueled gains, however, the e-commerce platform has experienced a reversal of fortunes. Difficult comps, a slowing of online spending, and persistent inflation have resulted in growth that has slowed to a crawl. Investors would be forgiven for thinking that Shopify's best days might be behind it.
Yet even as e-commerce growth seems dead on the vine, there are still plenty of green shoots that suggest life is about to burst forth. Shopify reported record-breaking sales during the Black Friday/Cyber Monday weekend, which grew 19% year over year and 21% in constant currency. Amazon also reported record-breaking sales, saying it was the company's "biggest holiday shopping weekend ever." With the world's largest digital retail platforms reporting record sales, it's unlikely that e-commerce has met an untimely demise.
There's more. E-commerce growth might have stalled temporarily, but the underlying secular tailwinds are picking up speed. The global e-commerce market is expected to surpass $3.3 trillion in 2022, rising to $5.4 trillion in 2026, according to Morgan Stanley.
Furthermore, Shopify estimates its total addressable market at $160 billion. When viewed in the context of its 2021 revenue of $4.6 billion, the untapped opportunity is clear.
2. Nvidia: Gaming is down but not out
Nvidia (NVDA -3.02%) is best known for the graphics processing units (GPUs) that make digital images come to life in gaming, but recently players have delayed upgrading to the latest chips until macroeconomic conditions improve. As a result, in Nvidia's fiscal 2023 third quarter (ended Oct. 30), revenue grew just 3% year over year, dragged down by a 33% decline in sales of gaming chips.
But it isn't just Nvidia feeling the pain. PC and laptop shipments fell nearly 20% year over year in the third quarter, the market's steepest decline in more than two decades according to Gartner. But even in the midst of economic upheaval, Nvidia increased its lead, with a dominant 88% share of the discrete desktop GPU market, up from 80% in the second quarter.
And gaming is just the tip of the iceberg for the semiconductor specialist. Nvidia is also one of the leading providers of processors used by data centers and cloud computing to speed movement around the ether, and is the top choice of each of the world's leading cloud operators. As a result, data center revenue grew 31% year over year in the third quarter.
That's just the beginning. Nvidia generated record revenue of $26.9 billion last year, which is a drop in the ocean compared to its massive opportunity. Management believes its addressable market is a whopping $1 trillion, which helps illustrate the substantial runway ahead.
3. The Trade Desk: The flag bearer for digital advertising
In the realm of programmatic advertising, nobody holds a candle to The Trade Desk (TTD 3.52%). The company's state-of-the-art adtech platform automates digital ad-buying in real time, helping marketers get more bang for their buck.
The Trade Desk is a pioneer in the field and continues to disrupt the status quo. The company built a broad coalition of the world's biggest advertisers, all of which have flocked to its Unified ID 2.0 -- the heir apparent to ad-tracking cookies, which are quickly going the way of the dinosaur. The Trade Desk also introduced OpenPath, which eliminates the intermediary and provides direct access to premium advertising inventory for those that use its platform.
To fully appreciate its position in the industry, let's compare The Trade Desk's recent results to its two biggest rivals. In the third quarter, digital advertising kingpin Alphabet grew revenue by just 6% year over year, while Meta Platforms revenue fell 4%. In contrast, revenue for The Trade Desk jumped 31%, helping to illustrate its clear advantage.
While estimates vary, global digital advertising spend is expected to grow from $521 billion in 2021 to more than $876 billion by 2026, a compound annual growth rate (CAGR) of roughly 11%, according to Oberlo. The Trade Desk's much higher growth rate shows that it's stealing market share from its rivals, which bodes well.
The Trade Desk generated revenue of $1.12 billion in 2021, which pales in comparison to its as-yet untapped opportunity. The global ad industry reached $772 billion in 2021, but is expected to top $1 trillion by 2026, giving The Trade Desk plenty of fertile fields to plow.
A word on valuation
It's important to note that all this potential comes at a price. Even as valuations have fallen significantly over the past year, none of these companies are cheap using traditional measures. The Trade Desk, Nvidia, and Shopify are selling at 14, 14, and 8 times next year's sales, respectively, when a reasonable price-to-sales ratio is typically between 1 and 2. However, given the combination of strong historic performance and significant future opportunity, it isn't surprising investors would award these stocks a premium valuation.
Those with the patience to let the recovery play out will be amply rewarded when the economy regains its footing, propelling these stocks skyward.
