The S&P 500 fell by about 19% in 2022 -- a top-seven drop for a single year. In the wake of that plunge, it seems, many people are looking for once-in-a-lifetime stock opportunities, hoping to invest significant sums of money and reap home-run returns rapidly.
Given this prevalent sentiment, let's set some expectations up front: I don't believe this is necessarily the exact perfect moment to invest in Olo (OLO 0.21%) and Udemy (UDMY 0.15%). Nor do I believe that you should go "all-in" on these promising companies. These growth stocks still have much to prove, and positions in them should consequently make up just a modest percentage of a diversified portfolio.
That said, these two stocks have fallen to attractive valuations during this bear market. And if things go right, shareholders who buy at their current levels could enjoy market-crushing returns -- not over the next couple of months necessarily -- but over the long haul.
1. Olo
The more I learn about Olo, the more I think about it as Shopify for restaurants. Shopify helps businesses handle all aspects of their e-commerce operations. Olo's name stands for "online ordering," which sounds limited in scope. But its software actually digitizes all aspects of operations for restaurants, not just online ordering.
Restaurants often use several different software solutions for tasks such as managing ordering, delivery, and reservations. Olo's platform integrates existing software solutions into one place to simplify everything for restaurants.
From there, Olo has different packages -- called modules -- to address its clients' specific needs. Currently, it offers 12 modules, but its average restaurant customer only used about three as of the end of 2021. Add-on modules include Dispatch, which allows restaurants to enable third-party delivery while keeping ordering in-house. Modules also include Olo Pay, which launched in 2022 and enables payment processing and fraud detection.
I really like the potential for Olo's modules to replace the restaurant industry's existing software solutions over time. Sitting on its board of directors since 2014 is Danny Meyer, founder of Union Square Hospitality Group and Shake Shack. With his background in restaurants, Meyer is acutely aware of operators' needs and potential areas of friction. And he can use this knowledge to help mold Olo into an ideal technology partner.
Olo has been steadily signing up new restaurants and believes that trend can continue. In the third quarter of 2022 alone, it added 2,000 new locations to its network, bringing its total to 84,000.
Moreover, Olo is increasing quarterly average revenue per unit (ARPU) as its clients add on more modules. In Q3, Olo's ARPU was $558, up 15% from the prior-year period.
With the chance to grow its customer base and grow spending per customer as more modules are adopted, it's not hard to imagine how Olo could achieve explosive revenue growth. Furthermore, the company has cash, cash equivalents, and short-term investments of $469 million on its books (and no debt), compared with a market capitalization of just $1.1 billion. Therefore, there's a fair margin of safety in Olo stock for those who buy today.
2. Udemy
Online education platform Udemy has a little more cash than Olo with $494 million (and also no debt). But its market cap is bigger at $1.6 billion, so it may not have the same degree of safety that Olo has. But an impressive opportunity is manifesting right before investors' eyes.
The courses on Udemy's platform are user-generated. As of September, there were over 213,000 courses developed by more than 74,000 instructors. And the platform had web traffic flowing in from more than 180 countries. Udemy is quickly becoming a place where anyone can teach anything to anyone, anywhere.
Individuals can purchase single courses or subscribe for unlimited content. However, the golden opportunity appears to be for enterprises.
Enterprises looking for skills-based courses for their workers (in lieu of formal degrees) can subscribe to Udemy Business. At the end of 2022's third quarter, Udemy had 13,437 enterprise customers, up a whopping 40% year over year. And annual recurring revenue from these customers hit $350 million, which was a 69% year-over-year jump.
Here's the best part: Because its content is user-generated, Udemy's profit margins are great. The company's Q3 gross margin was 56.4% compared to 55.2% in the prior-year quarter. And management expects this can reach the 65% to 70% range over the long term as the percentage of total revenue that Udemy Business supplies increases.
According to Udemy's management, having 13,000 enterprise customers is just 1% of its potential. So this is clearly a company with a lot of upside if things go right.
The balance of risk and reward has favorably shifted
As I mentioned at the outset, Olo and Udemy aren't perfect, and both still have a lot to prove. For starters, both are cash-from-operations negative, and their share counts are increasing moderately due to stock-based compensation -- both factors that can drag on shareholder value.
UDMY Cash from Operations (TTM) data by YCharts.
However, after share price drops of 86% and 63% for Olo and Udemy, respectively, from their peaks, I believe both are at reasonable valuations that could make them worth small buys for investors ready to accept a little risk for a shot at big upside potential.
