So far in 2023, the S&P 500 and the Nasdaq Composite indexes have risen 20% and 37%, respectively. This increase across the broader market has left many of today's popular stocks trading at premium valuations.
However, the three top-tier businesses we will discuss today have not seen their valuations balloon alongside their peers. In fact, their discounted prices -- paired with each company's unique, durable advantages -- make them top stocks to consider for the long haul.
PayPal (PYPL 2.90%), Coupang (CPNG -0.52%), and Insperity (NSP -4.37%) look like prime investments at today's prices for investors looking decades ahead.
1. PayPal
PayPal, home to roughly 400 million active consumer accounts and 35 million merchant accounts, is one of the most recognizable names in payments, and is ranked No. 28 on Kantar BrandZ's Top 100 Most Valuable Global Brands list. Its payment solutions include checkout, processing, digital wallets, and merchant services.
This strong branding helped fuel its two-sided network, where each new merchant who joined provided incremental value to existing consumers, and vice versa, much like Airbnb today.
Thanks to this robust brand image, PayPal grew the active accounts on its two-sided network by 14% annually since 2017. However, this growth slowed to just 1% in the company's most recent quarter, extending the market's worries over PayPal.
So why exactly is Paypal worth an investment right now?
First, despite this slowdown, transactions per account increased by 13%, which helped revenue grow by 9%. On top of this, new customers added through May of 2023 recorded a 28% average revenue per account increase in their first spending month compared to users added in 2022 -- showing even deeper engagement among new accounts.
Second, PayPal's forward price-to-earnings (P/E) ratio of 17 is below the S&P 500's average forward P/E of 21, making the company's profitability look cheap today. Should the company continue successfully shifting gears from high-growth mode to high-profitability mode, with a focus on engagement instead of adding users, it could quickly outgrow this discounted valuation.
Finally, companies in Kantar Brandz's Top 100 list have outperformed the S&P 500 by over 100 percentage points since 2006. Kantar calculates its rankings by combining a company's financial value with its ability to charge a premium or increase payment volume thanks to its brand image, generating a total brand value.
Paypal's high ranking indicates that it still has immense mindshare in the payments space, driving its engagement higher and leaving its discounted price to make it look like a top stock for the long haul.
2. Coupang
South Korea only has roughly 10% of the physical retail space as the United States, while its population density is around 15 times higher than in the U.S. Combined, these two figures make South Korean e-commerce juggernaut Coupang a compelling investment option, as they provide potential efficiencies of scale compared to its American counterparts, such as Amazon.
Whereas Amazon has to serve a massive geographic footprint in the U.S., Coupang's logistical network is much more compact. This leaves it uniquely positioned to drive outsize profitability compared to its e-commerce peers once it fully scales its operations.
With its first-party and third-party marketplaces, grocery delivery, and restaurant delivery offerings, Coupang commands an impressive 22% share of the South Korean e-commerce industry. However, Coupang's early days as a publicly traded company were marred by a wirehouse fire and heavy investments in its logistical network and warehousing infrastructure that sent many investors fleeing due to widening losses.
Despite this, Coupang's investments in its logistical network have finally started to pay dividends, as evidenced by its gross profit margin increasing from 16% to 24% in less than two years.
CPNG free cash flow (quarterly) data by YCharts.
Best yet, Coupang's quarterly net income and free cash flow both turned positive over the last couple of quarters as well, showing that the operational efficiencies we were hoping to see from the young company are starting to flow through to the bottom line.
While merely a projection, if the company were able to maintain this cash generation for the next two quarters, it would trade somewhere around 19 times FCF. Of course -- this is a big if -- but it puts into context how quickly Coupang could outgrow its valuation -- especially should it continue growing sales by 20% (on a foreign exchange neutral basis) as it did in the first quarter of 2023.
Currently, more than half of the company's 19 million active customers already signed up for its Wow membership, which is similar to Amazon Prime. With these valuable Wow members shopping more frequently and spending multiples more than non-members with the company, Coupang could see decades of steadily growing (and recurring) sales ahead of it -- making it a great business to hold forever.
3. Insperity
Up more than 600% over the last decade, business performance solutions provider Insperity might be one of the most successful stocks most investors don't know about. In more digestible terms, the company allows small to mid-size businesses (SMBs) to outsource all or a portion of their human resources functions, enabling them to focus on their core operations.
The company's cloud-based solutions include a full suite of services ranging from payroll and recruiting to compliance, benefits, and training, and it now serves over 11,700 clients and 300,000 employees across the U.S. This deep set of solutions is unmatched by any one of Insperity's peers and is oftentimes vital to the SMB niche that the company primarily caters to -- making the company's functions a must-have.
Currently, only about 8% of SMBs partner with companies like Insperity, leaving a tantalizing growth runway ahead. Better yet for investors, despite its FCF per share and revenue per share rising by 71% and 79% over the last five years, the company's share price has only risen 3%.
This leaves Insperity trading at just 13 times FCF -- a mark well below the market's median, as previously discussed with PayPal. Better yet, the company has averaged a cash return on invested capital (ROIC) of 61% since 2018. This metric measures a company's FCF-generating abilities compared to its debt and equity -- the higher, the better. Compared to the median ROIC of 4% in the Russell 2000 Index, it is clear to see that Insperity is one of the top compounders out there -- especially as this is its average figure across the last five years. This metric is particularly important as high-ROIC stocks have a history of outperforming their lower-scoring peers.
Recording 12% annualized sales growth over the last decade, Insperity's fair valuation, strong FCF generation, and long remaining growth runway make it a perfect stock to pick to beat the market over the long haul.
