Consumers drive the U.S. economy -- an estimated 68% of America's gross domestic product comes from personal consumption. This means that stocks of companies where consumers open their wallets can be significant long-term investments.
I have identified a few high-quality consumer names that have been doubted by some, pushing valuations to on-sale levels. Here is what you need to know about these three growth stocks and why they could outperform.
1. Amazon
E-commerce is a foundational part of consumer spending in America, and nobody does e-commerce like Amazon (AMZN 1.30%). The company has a staggering 37% market share of online sales in the U.S. With Walmart coming in at No. 2 with just a 6% share, it's hard to see anyone catching Amazon, especially after the company pumped up its supply chain investments in recent years, building a logistics network for order fulfillment that might be unmatched worldwide.
You can see that Amazon's annual investments have almost quadrupled from pre-pandemic levels, which has hurt its bottom line. However, those investments have seemingly peaked, and the payoff could be a new age of strong earnings growth. Analysts believe the company's earnings per share (EPS) will grow swiftly, especially as other businesses like Amazon Web Services (AWS), advertising, and Prime memberships continue expanding.
AMZN capital expenditures (TTM) data by YCharts. TTM = trailing 12 months.
Don't forget Amazon's bread-and-butter business, either; e-commerce still represents just 15% of retail sales in America, a long runway to expand over the coming decades. The stock has recently picked up steam, rising nearly 50% since January. But it is arguably still cheap at 23 times its operating profits (notably below decade averages), and much of the company's recent years of investment haven't yet borne fruit for the bottom line.
It remains a multifaceted growth stock with years of steady opportunity ahead.
2. Roku
Retail isn't the only large industry going through a digital transition. Streaming is becoming both the present and future of entertainment as eyeballs move online and advertising dollars follow them.
Roku (ROKU 5.41%) is a leading streaming platform which makes hardware and software that enable users to view streaming content on their smart televisions. The company has steadily expanded over the years, and today has about 72 million users watching 25 billion hours of content every quarter.
Roku makes money on its platform by selling advertising inventory to brands that want to reach its user base. It intentionally loses money on its hardware (streaming dongles, etc.), seeing those devices more as a user acquisition tool.
But Roku's advertising business has struggled in recent quarters as marketers tighten their spending in fear of a recession. This has choked off growth and soured market sentiment, pushing the stock to its lowest price-to-sales ratio (P/S) since going public.
ROKU PS ratio data by YCharts; YoY = year over year.
The lack of revenue growth won't do over the long run; the company isn't even profitable yet. But there's at least a solid possibility that growth rebounds when ad spending picks back up.
Roku hasn't stopped picking up users, so this is an issue with monetization, not whether people use the platform. Meanwhile, the company is expanding internationally, chasing a vast global streaming opportunity. Assuming its growth eventually comes back, investors might look back on this as an opportunity to buy a winner during its darkest days.
3. Ulta Beauty
Makeup and cosmetics have been a staple of human culture for centuries, and it remains a high-demand business today. Ulta Beauty (ULTA 0.31%) is one of the world's largest cosmetics companies, selling both low- and high-end products from more than 600 companies along with its private-label brand. Gen Z consumers are an important force in the cosmetics market today, pushing for innovation, and Ulta is aiming -- with great success so far -- at meeting that demand.
ULTA PE Ratio data by YCharts. PE= price to earnings.
But Ulta has had a rough go of it lately. Management noted that higher theft rates have hurt profit margins more than in years past, an issue seen across the industry. And younger consumers might face external pressures on their spending, like resuming student loan payments and high housing costs. That might not keep people from buying cosmetics, but it could mean more price-conscious consumers and trading down from higher-end to lower-end brands.
The stock's decline reflects these possibilities, but the drop might have gone too far. Today, Ulta trades at a price-to-earnings ratio of 17, roughly half its average over the past 10 years. Meanwhile, analysts expect growth in earnings per share to average 12% annually over the next several years, with a price/earnings-to-growth (PEG) ratio of 1.3.
The stock has outperformed the S&P 500 handily since going public, and the current valuation and growth outlook could fuel market-beating returns in the years ahead.
