Success in tech requires many attributes that go beyond producing a high-quality offering. It also necessitates evaluating strengths, weaknesses, opportunities, and threats and acting accordingly.
Tech companies such as Apple and Netflix drove massive stock returns in past years by outsmarting their peers. But today, Shopify (SHOP -1.87%), DigitalOcean (DOCN -3.39%), and MercadoLibre (MELI -0.86%) follow that approach. All three companies sell for a much lower price-to-sales ratio (P/S ratio), a measure of a company's valuation relative to revenue levels. Additionally, each company holds tremendous potential for outsized gains through unique and appealing business models.
1. Shopify
Shopify has emerged as the most popular e-commerce platform in the U.S. by thinking differently. Direct competitors such as WooCommerce, Squarespace, and Wix perceive themselves as software providers. In contrast, Shopify stands out by identifying as an e-commerce facilitator.
The company invested heavily to make its platform fast and customizable. It has also added fintech, marketing, and inventory management capabilities to build an ecosystem.
However, the one area that shows its willingness to venture outside of software is its Shopify Fulfillment Network (SFN). The SFN provides two benefits. It offers the storage, packaging, and shipping services that many of its clients need. Second, it offers a service that software-oriented peers will probably not copy, allowing it to transcend its peers competitively.
Amid an e-commerce slowdown, revenue of $3.9 billion for the first nine months of 2022 grew 20% compared with the same time frame in 2021. Although it lost $2.8 billion during that time frame, Shopify invested heavily in areas such as research and development and general and administrative to improve the company, factors that should boost revenue long term.
Due to the tech slump, Shopify trades at an 80% discount to its all-time high. That lower price means it now sells for a P/S ratio of 9, a metric unaffected by the recent investments Shopify has made in itself. Hence, its valuation, along with its long-term growth trajectory, could help Shopify stock recover.
2. DigitalOcean
Another company outsmarting competitors by venturing into new business lines is DigitalOcean. The company provides a cloud infrastructure platform for small and medium-sized businesses (SMBs). And despite competition from Amazon, Microsoft, and others, it stands a high chance of success for two reasons.
One is its transparent pricing. Clients need only buy the low-cost services they need. While the tech giants could compete in theory, such an approach would probably reduce their revenues significantly, making a similar move unlikely.
Second, it offers educational products and fosters a network among its clients. SMBs may lack the resources to employ an IT staff. Instead, these businesses can consult DigitalOcean resources or one another to solve problems, likely saving them money.
So lucrative is this opportunity that DigitalOcean forecasts a compound annual growth rate for its industry of 27% through 2025. That will mean an industry size of $145 billion.
In contrast, DigitalOcean generated only $413 million in revenue in the first nine months of 2022. Still, revenue rose 34% compared with the same period in 2021. That also accounted for existing clients, which spent 18% more on the platform on average.
Admittedly, DigitalOcean has suffered an 80% drop from its late-2021 high. Nonetheless, that has taken the cloud stock's P/S below 5. As the cloud becomes more of a necessity for small-to-medium-sized businesses, DigitalOcean is likely best positioned to capture more of this client base.
3. MercadoLibre
MercadoLibre's intelligent approach to e-commerce has succeeded despite the challenges of doing business in Latin America. The company built an ecosystem that grew from addressing challenges unique to its region.
For example, since many prospective shoppers lack a bank account or credit card, it created Mercado Pago to provide fintech services to cash-based customers. Also, rapid shipping was rarely available in Latin America. Hence, it established Mercado Envios to store, package, and ship goods for sellers promptly.
Competitors such as Amazon and Sea Limited have moved into parts of Latin America. However, with MercadoLibre able to offer more services, these e-commerce giants appear to operate at a disadvantage.
Moreover, MercadoLibre is not slowing down. Revenue of $7.5 billion for the first nine months of 2022 surged 53% higher compared to the same time last year. Additionally, the company turned profitable in 2021 and claimed a net income of $317 million in the first three quarters of last year. This is a huge relief to investors less tolerant of the losses that often characterize tech-oriented stocks.
Indeed, the company was not immune to the tech bear market, and it is down by almost 60% versus its 2021 high. Nonetheless, with a P/S ratio of 4.5 and its ability to drive higher revenue in the challenging Latin American business environment, its intelligent management decisions could drive massive gains for investors.
