The stock market threw investors a curveball last year, with highly valued growth stocks getting hit the worst of all. The growth-heavy Nasdaq Composite is currently down 26% from its previous high, but these sharp corrections in market prices can create incredible buying opportunities for long-term investors.
While market corrections and bear markets usually bring everything down with it, the strongest companies will eventually rise to the top again. One industry that will only continue to grow and produce long-term winners is e-commerce.
Amazon (AMZN -1.07%) and PayPal Holdings (PYPL -2.36%) have seen their share prices fall hard over the last year, but here's why these companies are well positioned to bounce back.
1. Amazon
Shares of Amazon have fallen 45% from their all-time highs. There are several reasons to take advantage of the discount.
There has been a lot of attention on Amazon's year-over-year growth, which has sent the stock down. Revenue grew 20% in 2019, 38% in 2020, 22% in 2021, and just 9% last year. But Amazon's total revenue is 77% higher than in 2019. Most of that growth is coming from higher-margin services, such as subscriptions, advertising, and cloud services.
Data source: Amazon. Chart by author.
Management has reinvested its free cash flow over the last few years in doubling its fulfillment infrastructure, which is widening the retail operation's competitive moat. These expenditures should deliver more growth, since once you're a Prime member, it's hard not to justify buying everything from Amazon. This will play to Amazon's advantage as it continues to grow into an expanding global e-commerce market estimated to reach over $7 trillion by 2025, according to eMarketer.
Amazon has also become more efficient with managing inventory. It now has better placement of goods at regional fulfillment centers around the U.S. to lower costs and speed up delivery to Prime members. This will also pay big dividends over time.
Of course, Amazon is also a heavy investor in advanced technologies, such as artificial intelligence and high-performance computing. This powers product recommendations and the Alexa voice assistant, among other things. Investors shouldn't discount Amazon's ability to find new sources of growth over time using this important technology.
With the stock trading at its lowest price-to-sales ratio in nearly a decade, the market could be significantly undervaluing the business ahead of these opportunities.
2. PayPal
Shares of PayPal are 75% off their previous highs. There's a lot of bad news priced into the stock right now, which makes the stock an attractive contrarian bet.
PayPal is a leading digital payments provider with 435 million active accounts. It has nearly doubled its active accounts from 2015, but like Amazon, slowing growth has sent the stock tumbling well off its previous highs.
While most investors recognize the incredibly strong moat around Amazon's business, Wall Street is pointing at competition for PayPal's slowing momentum. And there are good reasons to take these threats seriously.
In recent years, the digital payments landscape has grown more competitive. The biggest threat is Apple, which has a massive installed base of iPhone users that provide a ready-made market for Apple Pay. The company solidified its competitive position in the mobile payments market when it partnered with Goldman Sachs a few years ago to offer a credit card to go along with its digital wallet.
But these competitive threats are probably overdone. PayPal has a formidable advantage connecting users with 35 million merchant partners. This two-sided network of connecting individual users with brands is why PayPal continues to see growth in total transactions, increasing 13% year over year in the fourth quarter.
PayPal may not grow as fast as it did before the pandemic, but it doesn't have to. The market has low expectations for growth, as noted by the stock's modest price-to-earnings ratio of 15 based on this year's earnings estimates. That's a fairly large discount to the average stock's earnings multiple of 22.
Still, management guided for about 18% growth in adjusted earnings per share for 2023. This stems from efforts to control costs, which seems like a surefire path to growing earnings over the next several years and delivering returns to investors.
I believe the inherent advantages in PayPal's widely used payments platform will allow the company to continue delivering better-than-expected earnings growth than the market is anticipating right now. If the company delivers on guidance, PayPal stock could be a steal at its current valuation.
