With the overall stock market still down over the past year but up so far in 2023, and many individual stocks following that same pattern, it looks like a good time to buy into the market's rising enthusiasm.
We're still not quite entering a bull market yet. One feature of a typical bull market is that stock valuations can become inflated as confident investors buy stocks and push their prices up beyond a point that seems reasonable.
In the market we're in now, valuations are likely to be low and give investors a more grounded sense of the company's stock price as compared with its potential. That can make it easier to make sensible investing decisions. It can also help you identify stocks that seem to be undervalued, which is more likely in this kind of market, giving these stocks incredible potential to become multibaggers.
Global-e Online (GLBE -0.97%) and Farfetch Limited (FTCH -2.06%) are two stocks that may be trading beneath their true value and could turn $10,000 into $50,000 over the next seven years. Here's why.
1. Global-e: The leading provider of cross-border e-commerce solutions
Global-e markets a business-to-business platform that gives retailers a collection of tools for cross-border commerce. These are simple but necessary solutions for a global retail presence, such as checkout in almost 200 currencies and custom payments calculated by country.
Global-e counts many of the world's top brands as customers, and new ones keep signing up. Some examples are Disney and LVMH, both of which operate several e-commerce channels and expanded their partnerships with Global-e.
Growth has been tremendous. Sales increased 67% year over year in 2022 despite the general slowdown in e-commerce, and new clients like celebrities Justin Bieber and Kim Kardashian joined the platform for the retail brands.
For Global-e's stock to increase 500%, its market cap would go from a current $4.86 billion to $24.25 billion. Its recent price-to-sales ratio was about 11.5. At that ratio and market cap, it would have to produce annual sales of $2.1 billion to reach a 500% gain over the next seven years.
That implies a compound annual growth rate (CAGR) of 26%, which seems very doable. For 2023, it's guiding for about 38% sales growth at the midpoint.
Although that's not objectively cheap, this is the kind of stock that would have been trading for many times its current valuation a few years ago when investor confidence ran high. And when lined up with its long-term potential, it's a valuation that looks compelling.
Just to throw in another scenario, if the price-to-sales ratio were to increase to the three-year average of 21, it would need to reach annual revenue of only $1.2 billion in the next seven years, requiring a much lower CAGR and looking eminently surpassable.
2. Farfetch: A luxury player with big aspirations
For Farfetch to deliver the same kind of gains is, well, a little more farfetched. But for investors with a high appetite for risk, this could be a very interesting stock to own, notable because of its dirt-cheap valuation.
Farfetch is a luxury e-commerce retailer with its own e-commerce platform. It also markets a white-label e-commerce plan for clients (meaning that it creates and operates a site under a client's brand name).
Like many e-commerce companies, sales took off during the pandemic. And like its peers, it's been rough to generate sales growth in the aftermath. Revenue creeped up only 3% year over year in 2022. Gross merchandise value decreased 4%, although it was up 2% in constant currency.
Farfetch works with many of the most upscale global names, and with $2.3 billion in 2022, it's already established itself as a force in luxury goods. However, the company made several acquisitions recently, and coinciding with decelerating sales, its profitability was severely impacted. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) went from $1.6 billion in 2021 to a $99 million loss in 2022. Management is now turning its focus to cutting costs.
It's not surprising that investors have lost confidence in Farfetch for the time being, and its stock is down 64% over the past year. At this price, shares trade for a cheap price-to-sales ratio of only 0.8. That means that its market cap, which is $1.7 billion, is less than its trailing-12-month revenue.
At that market cap, gaining 500% would become $8.5 billion. The mechanics here are a little awkward, because a price-to-sales ratio of less than 1 implies that investors aren't seeing the potential. It would mean a CAGR of 24% over the next seven years and an annual revenue of $10.6 billion, which doesn't seem plausible now. The likelihood is that if revenue begins to increase, the price-to-sales ratio would as well, and the chance of turning $10,000 into $50,000 would be more realistic.
Using the three-year average price-to-sales ratio of 5.7, the assumed annual revenue in seven years would be only $1.5 billion, or less than it is today. That's not likely to happen either, but it illustrates the risk investors are assigning to this stock and why its price is so low.
The more likely way it will play out will be somewhere in the middle. Using the midpoint of about 2.6 for the price-to-sales ratio, trailing-12-month revenue would reach $3.3 billion to gain investors 500%. That definitely seems like it could happen over the next seven years, if not much sooner. It's still risky, but it's a risk that some investors might find very tempting.
