Welcome to earnings season, folks. As companies of every description roll out their business results for the second quarter of 2023, some stocks are poised to outperform with incredible growth prospects and modest share prices.
Here are three magnificent growth stocks that a panel of The Motley Fool's sharpest tech experts finds particularly compelling right now. Read on to see why you should consider Fiverr International (FVRR +0.95%), Sea Limited (SE +5.63%), and ASML Holdings (ASML 2.18%) right now.
NYSE: SE
Key Data Points
This e-commerce leader did an amazing about-face
Nicholas Rossolillo (Sea): Southeast Asia's leading e-commerce company, Sea, has pulled off quite the stunt. In about a year's time, management has ditched its "grow at any cost" mentality and is back to generating profit again -- on both a GAAP and free cash flow basis. Net income was $87.3 million on revenue of $3 billion in Q1 2023, so the company still has work to do, but the progress is nonetheless commendable.
Data by YCharts.
Sea did this about-face by aggressively paring back on its global expansion plans, and instead refocusing on its home turf in southeast Asia -- fast-growing digital markets and fast-developing economies all on their own. Plans for Latin America (home of rival Mercado Libre (MELI +1.76%)) have also been scaled down to focus primarily on Brazil. E-commerce and digital finance revenues were up a respective 36% and 75% year-over-year to kick off 2023, as the company's Shopee app and SeaMoney financial technology services keep picking up lots of new users.
Of course, overall momentum at Sea has stalled out, thanks in large part to the digital entertainment segment Garena, publisher of the global hit game Free Fire. The game is approaching its six-year anniversary, and as has been feared for some time by investors, monetization is petering out as the title ages.
Unfortunately, video games are not fine wine. The digital entertainment segment's sales fell a whopping 43% year-over-year, almost totally offsetting Sea's progress in e-commerce and digital money. Total revenue in Q1 was up just under 5% from last year.
Nevertheless, I'm still nibbling on shares of this online juggernaut ahead of the next earnings report (likely in mid-August). The stock trades for less than three times trailing 12-month sales, and if progress can continue to be made on profit margins, there could be a lot of long-term value in this beaten-up e-commerce company. All the same, I file this away in my list of high-risk but potentially high-reward investments, but Sea still has my attention.
NYSE: FVRR
Key Data Points
Fiverr redefines the concepts of "work" and "careers"
Anders Bylund (Fiverr): The gig economy was a big deal in the early days of the COVID-19 pandemic. Millions of people found themselves stuck at home with nothing to do, and every bit of extra cash was important. Many stocks in this category soared in 2020 thanks to a sudden influx of business growth. Freelance services marketplace operator Fiverr International was a prime example of this effect. As a leading provider of gig economy services, Fiverr saw its shares skyrocket 730% higher in 2020.
When effective vaccines became widely available and people got back to their office cubicles, Fiverr's stock ran out of gas. The share price fell 42% in 2021 and another 74% last year. All in all, Fiverr shares have lost 90% of their value since the lofty peak of early 2021.
But the business certainly didn't peak in 2020. Freelancing and gig economy services are alive and well, and Fiverr's trailing sales have more than tripled since the onset of the pandemic.
The victory parade back to the former ghost towns of office buildings has not been smooth. Companies calling their work-from-home employees back to the centralized desk farms often meet spirited resistance from workers who get the job done from home and prefer working that way. With no rush-hour commute to worry about, many still have extra time to spend on a side gig through services like Fiverr.
And Wall Street's mix-up doesn't end there. Many investors see artificial intelligence as a direct threat to Fiverr's business model -- why hire a freelancer when a computer can do the same creative job for free? In reality, generative AI tools like ChatGPT (for writing text) and Midjourney (for digital images) can come up with some great stuff -- but they need a lot of human hand-holding along the way. Crafting effective instructions to these AI platforms has become a valuable skill in itself, and many freelancers are selling precisely that service on Fiverr these days.
This company wants to change how the world does business. Embracing AI tools is just another facet of that long-term ambition. CEO and co-founder Micha Kaufman is downright excited about the business implications of AI-assisted freelancer services.
"Our freelancers can use technology to work less hard and focus more time on their creativity, which also means that they can deliver faster output for their customers. Their customers receive higher quality and faster products. So it's a great plus," Kaufman said at a recent industry conference. "It's just changing the nature of skills and professions. [...] I don't think that AI is going to replace human beings, but I think that human beings that master AI are going to replace professionals who don't."
Kaufman will tell us more about the AI opportunity and how it plays into Fiverr's actual business results when the second-quarter earnings report hits the news wires on August 3. Bearish investors may expect doom and gloom but I'm convinced that Fiverr is just getting started on a long and successful growth story.
So I'll go over that report and the accompanying conference call with a fine-toothed comb, looking for AI updates and potential challenges. I'll pay particularly close attention to management's market analysis and financial guidance. They currently expect modest growth in the second quarter but a robust return to strong order flows in the second half.
Heading into that report, Fiverr's stock is priced as if the company is headed off a cliff without a parachute. That's a big mistake, leaving Fiverr's buying window wide open. Feel free to do your own research and double-check my assumptions, but Fiverr strikes me as one of the best buys in today's market.
NASDAQ: ASML
Key Data Points
ASML gave a cautious outlook for 2024, but 2025 should be a blockbuster year
Billy Duberstein (ASML Holdings): Dutch technology giant ASML Holdings sold off after its second-quarter earnings report, and again after the report of its largest customer Taiwan Semiconductor Manufacturing (TSM 1.04%). But this hiccup in the semiconductor industry recovery could open an opportunity to buy this dominant equipment provider.
ASML owns a monopoly on extreme ultraviolet lithography (EUV), which is the key technology in producing advanced semiconductors and DRAM memory. And in the age of artificial intelligence, both leading-edge semiconductors and DRAM will be in high demand.
Yet as of now, while AI demand is strong, the rest of the semiconductor industry remains in a slump that started in the second quarter of 2022. It appears as though the large hangover from the consumer electronics boom during the pandemic of 2020-2021 is still here, after consumers loaded up on smartphones and PCs.
ASML has a large backlog and projected stronger-than-expected growth this year around 30%, mostly due to a surge in demand for DUV machines for trailing-edge chips that go into EVs, IoT applications, and other industrial end-markets, especially in China. However, on the conference call with analysts, management projected caution for 2024 and couldn't provide guidance for what they thought next year would bring, due to uncertainty over the global economy.
However, 2025 should be a very strong year for ASML regardless. This is for a number of reasons. First, there are a number of leading-edge fabs for the 2nm node that are set to come online in 2025, and those will probably come through regardless of the state of the global economy. This is for competitive and strategic reasons, as Samsung is making a big push to catch up to TSMC on the 2nm, which both companies will work on in 2025.
Second, the 2nm node will likely require ASML's NXE:3800E EUV machine, the next generation from today's NXE:3600D model. On the call, management disclosed the new machine will have a price point above 200 million Euros, a big step up from the current NXE:3600D, which is priced around 150 million Euros.
Not only that, but that price uplift should lead to a rise in gross margins, as ASML is incurring costs today for its high-NA EUV machines that will come after that, and will be necessary for future advanced nodes. When the 3800 and high-NA machines ramp in the coming years, ASML will be able to leverage the extra costs it's incurring today, thus seeing expanding margins.
And by 2025, those phones and PCs bought during the pandemic may be coming to the end of their useful lives, which means even the mature parts of the industry could be in an up-cycle by then.
It's quite possible, at 35 times earnings, that ASML falls further after its strong run to start 2023. But if the stock falls on fears of a potential soft year in 2024, it would be a buying opportunity based on a likely revenue and profit acceleration in 2025.
