To determine which stocks might be the best performers in 2023, it's important to assess how the broader economic environment might look. Right now, it's plagued by soaring inflation, which hit a 40-year high in the U.S. back in June, and rising interest rates, which are placing further pressure on household finances.
As a result, companies that generate most of their revenue from consumers have seen their stock prices plummet over the past year.
But the stock market is forward-looking, and that red-hot June inflation result might have been the peak because it has fallen every month since. If that trend continues, consumer spending might pick up in 2023, which could inject life back into stocks like Sea Limited (SE 2.03%) and Snap Inc. (SNAP -2.72%).
Here's why they could be among the best performers in the new year.
1. Sea Limited
Sea Limited is a quintessential consumer company. Its three core segments -- e-commerce, gaming, and digital payments -- all rely on consumer spending. As such, its stock has collapsed by 86% from its all-time high amid recent economic challenges. But if the economy really is turning the corner, that could be an attractive opportunity.
Sea Limited's largest segment is e-commerce, led by its Shopee app, which is a hybrid consumer-to-consumer and business-to-consumer ecosystem. In the recent third quarter (ended Sept. 30), a whopping $19.1 billion was spent on Shopee, which drove Sea Limited's revenue to $1.9 billion, up 32% year over year.
That's a robust growth rate given the circumstances, and it's helped by the company's geographic diversity with a dominant market position across several parts of Asia.
Sea Limited's digital entertainment segment, which is headed up by its Garena game development studio, isn't faring so well. Now that pandemic restrictions have been lifted around the world, people are spending less time in front of screens, and so Sea Limited just saw a 22% drop in its quarterly active users during Q3. They're also spending less money, with bookings (a precursor to revenue) shrinking by 45% -- but this is the metric that might catch a boost as the economy recovers.
Sea Limited has been focused on running a leaner business through this period. Its Q3 net loss of $569 million was its smallest in over a year, and with $6.2 billion in cash, equivalents, and short-term investments on its balance sheet, the company is in great financial shape heading into 2023.
With Sea Limited stock trading at a price-to-sales ratio of just 2.2, which is the lowest level since the company went public, this might be close to a rock-bottom entry point.
2. Snap Inc.
Snap Inc. is the parent company of popular social media platform Snapchat. Its direct-to-consumer revenue is minuscule and comes by way of a small subscription it sells to improve its users' experience. The majority of the company's revenue comes from businesses paying to advertise on the platform, and when consumers aren't spending money, those ad dollars dry up.
But Snap is tackling this tough period head-on, pushing forward with its innovative efforts to build unique augmented-reality-powered advertising tools, which businesses are already having major success with. In the third quarter, American Eagle used this technology to allow users to engage with different clothing outfits virtually, and it drove 11 million impressions at an average of 30 seconds each. When was the last time you interacted with a social media ad for that long?
This has interesting implications for the coming wave of social commerce, which weaves shopping experiences into social media platforms so users can buy products with very little friction, often without even leaving the app.
Snap's revenue grew by a sluggish 6% in Q3 as advertisers pulled back on their spending, but there's one reason to be optimistic about Snap's prospects next year. Snapchat's daily active users jumped 19% to 363 million, so when businesses are ready to start increasing their marketing spend again, Snap is going to have a much larger base to monetize. That should drive an organic boost to the company's revenue over time.
Snap stock has declined 89% from its all-time high. Much like Sea Limited, Snap's price-to-sales ratio of 3 is the lowest level in its history as a public company, dating back to 2017. With inflation beginning to tick down in the U.S., a consumer recovery might be on the cards in 2023, which could drive a resurgence in business spending. That scenario would play right into Snap's hands, so investors might do well to grab some shares at this heavily beaten-down price.
