The Nasdaq Composite has rebounded around 35% so far this year, which shouldn't come as a surprise. The stock market occasionally falls, as investors were reminded in 2022, but fundamental business values always win out in the long run. Lower valuations for stocks set the stage for long stretches of rising stock prices that can last for years.
While it's difficult to know if this is truly the start of a new bull market, there are great stocks trading well off their highs that should deliver great returns over the long term.
Etsy (ETSY 0.34%) and Chewy (CHWY 2.99%) are two e-commerce leaders trading well off their previous highs. Here's why their growth stories are far from over.
1. Etsy
Shares of Etsy have rebounded 21% since hitting a 52-week low of $80.44 earlier this year. E-commerce is still a massive opportunity expected to reach more than $6 trillion globally in 2023. It's a huge opportunity for a marketplace with 95 million active buyers.
Etsy is not immune to inflation and other headwinds impacting consumer spending. Revenue is still growing around 10% year over year, but gross merchandise sales, which is the total value of transactions on the marketplace, fell 4.6% year over year in the first quarter. The company is doing a good job to better monetize its buyers and sellers, but it will likely continue to report sluggish transaction activity until inflation and other economic headwinds clear.
Successful investing is not about timing the market, but looking over the next 10 years and determining whether a business can grow larger than it is today. The reason investors should have confidence in Etsy's future is that it has nearly twice as many buyers browsing its marketplace as it did pre-pandemic. This large base will be valuable as Etsy continues to improve the shopping experience with machine learning and other features designed to make the website more personalized.
Etsy already has a valuable asset in the unique nature of the merchandise on offer. Buyers are attracted to the massive selection of handmade items from millions of sellers. This distinguishes Etsy's offering in a world of commodity retail merchandise. Investors can bank on this unique quality driving more growth for the business over time.
The stock appears undervalued in light of the opportunities still ahead. It trades at a forward price-to-earnings (P/E) ratio of 22.8, which is a discount to the average stock's 26 P/E.
2. Chewy
After hitting an all-time high during the pandemic, Chewy stock has fallen about 70%. A drop that steep can usually be blamed on a combination of an expensive valuation and weaker operating results from the underlying business. But like Etsy, Chewy has experienced some difficulties over the last year, although there are clear signs that the business is doing just fine.
When inflation is out of the way and consumers have more money to spend, Chewy will certainly benefit. While revenue growth slowed over the last year, Chewy is still reporting year-over-year growth of nearly 15%, which indicates a huge addressable market.
While Chewy saw a slight decline in active customers in the recent quarter, it's likely a temporary pause in growth given the economic challenges. There's nothing wrong with Chewy's competitive position. Investors can look at the 15% year-over-year increase in sales per customer and the uptick in customers using the company's auto ship program as healthy signs of customer satisfaction.
The company is also proving it can invest to expand the business without sacrificing profits. First-quarter adjusted profit was $87 million, more than double the profit in the same quarter two years ago.
At a price-to-sales (P/S) ratio of 1.39, the stock is not expensive at all. That is much more attractive than its P/S multiple of around 6 in 2021, which was expensive.
As Chewy continues to improve the efficiency of its fulfillment network and grow high-margin sources of revenue from health services and other product categories, the business should see improving profitability and a higher stock price in the years to come.
