The past few months have been a pleasure for investors who endured brutal stock declines throughout most of the past year and a half. Some growth stocks have rallied from lows to shower shareholders with large year-to-date gains.
Will these stocks continue soaring? Investors shouldn't get too high or low; the stock market ebbs and flows -- it's normal. But just because stocks occasionally take a step back doesn't mean that investors are done seeing strong returns.
Three Fools have done the detective work on Amazon (AMZN 3.43%), Shopify (SHOP 1.11%), and Pinterest (PINS 4.04%) to see whether they can continue delivering portfolio-lifting upside moving forward.
You need to see this.
It could be upward and onward for this $1.4 trillion e-commerce giant
Justin Pope (Amazon): The nearly 60% decline Amazon experienced last year was its sharpest decline since the Great Recession more than a decade ago. But a remarkable turnaround has occurred; shares are up more than 50% since the beginning of 2023. Buying a stock after a 50% run can feel sheepish, but the data shows more upside could lie ahead.
For starters, Amazon's decline pushed the stock to its lowest valuation in ten years. Investors can value Amazon by looking at its share price relative to its operating profits. You'll see below that since the stock came from such a deep low, shares are still arguably undervalued today based on their 10-year history.
AMZN Price to CFO Per Share (TTM) data by YCharts
But rather than valuation alone, hefty underlying earnings growth makes Amazon a potential winner. The company owns the top spots in U.S. e-commerce and global cloud computing, two industries with tremendous growth opportunities over the next decade. E-commerce is still just 15% of U.S. retail sales, and researchers believe global cloud spending could hit $1.5 trillion by 2030, a 14% annual growth rate from today's levels.
Analysts project Amazon could grow its earnings-per-share (EPS) by 34% annually over the next three to five years. That might translate into some needle-moving investment returns for investors, considering the attractive valuations shares still trade at.
Up 97% year-to-date, is it too late to buy Shopify?
Jake Lerch (Shopify): It's been a bounce-back year for Shopify, as shares of the e-commerce company are up 97% year-to-date. Yet, for investors willing to buy and hold, there may be plenty of upside left.
Shopify, which operates a 'one-stop shop' platform for online merchants, could be one of the companies best positioned to benefit in the next bull market, due to its three key advantages:
- Fantastic growth
- An enormous target market
- Its moat
Regarding growth, Shopify grew revenue at a 25% year-over-year rate in its most recent quarter (the three months ending on March 31, 2023). That's a far cry from the more than 90% revenue growth it logged back in 2020, but 25% revenue growth is still impressive.
What's more, Shopify could grow much, much larger, given its total addressable market. Estimates vary, but some reports place the full size of the e-commerce market at more than $5 trillion. With trailing twelve-month revenue of $5.9 billion, Shopify has only scratched the surface of its full potential.
Finally, Shopify's moat is another key advantage. Merchants who choose Shopify can rely on the company's modules to run and manage their business. The company offers assistance with shipping, payments, and even compliance, making it easy for merchants to sell their products globally. Thus, once a merchant gets up and running, there is a real cost to leaving the platform.
Granted, Shopify has always been a volatile stock, and it's not for every investor. Shares trade at a price-to-sales (PS) ratio of 15x. That's far above the S&P 500's average PS ratio, which is around 2.6.
Yet, for long-term investors willing to buy and hold, Shopify remains a savvy pick to own for the next bull market.
This ad stock may finally be ready to pin down gains
Will Healy (Pinterest): Pinterest (PINS 4.04%) is a relative latecomer to the rally. Until early May, it had been down on the year. However, despite the hiccup, the stock has risen close to 25% this year, approximately 45% from its low in May.
Its original revenue source, advertising, seems to have begun to recover. Another reason is its pivot into e-commerce. Under the leadership of Bill Ready, who became CEO in June 2022, it has begun to become more of an e-commerce site through shoppable pins.
Another indication of room for growth is the average revenue per user (ARPU). In the first quarter of 2023, global ARPU came in at $1.32. In comparison, Snap (NYSE: SNAP) achieved $2.58 in ARPU, while Meta Platforms (NASDAQ: META) reported an ARPU of $9.62. Assuming its new strategy can help Pinterest's ARPU catch up to its peers, it should make gains if its ARPU catches up to its peers.
Admittedly, both the U.S. & Canada and the Europe segments reported modest improvements in revenue. Still, ARPU outside of these areas was just $0.10. With revenue in those areas up 38% year over year in Q1 (it was up 5% globally), those regions may bring Pinterest considerable growth over time.
Furthermore, the user base has begun to make a comeback. After shrinking when the lockdowns began to abate, monthly active users (MAUs) are on the rise. The 463 million MAUs reported at the end of Q1 rose 7% from year-ago levels. That should stoke revenue growth in all of Pinterest's segments and, hopefully, help with the desired increases in ARPU.
Finally, despite the recent increases in the stock, it now supports a price-to-sales (P/S) ratio of 7. That is a significant discount from the 2021 bull market when the sales multiple reached as high as 30. Even if the P/S ratio returned to its pre-pandemic ranges between 10 and 20, it would dramatically boost the social media stock as it plays a more prominent role in advertising and e-commerce.
