It's been a rocky couple of years for the stock market, but investors should always remember that the volatility often comes with lower valuations for quality stocks, paving the way for strong returns. And there are plenty of great stocks that are poised to bounce back.
One of the best ways to pick future winners when the markets are down is to invest in strong brands you know. You're likely familiar with Etsy (ETSY 0.34%), Ulta Beauty (ULTA -0.40%), and Shopify (SHOP 1.11%). Let's see why three Motley Fool contributors believe these growth stocks can head higher.
This dip won't last forever
Jeremy Bowman (Etsy): Etsy was one of the major pandemic-era winners in e-commerce. Its revenue more than doubled for several consecutive quarters during the COVID-19 crisis.
However, since hitting those peaks, the growth stock has delivered a series of disappointments to investors. Revenue has nearly flatlined as COVID restrictions lifted and consumers shifted their spending to categories like travel and dining. Meanwhile, Etsy took roughly $1 billion in asset impairments for its acquisitions of Depop and Elo7, a sign it overpaid for those e-commerce marketplaces. The company ended up selling Elo7, dubbed the Brazilian Etsy, for significantly less than it paid for it.
Investors have punished the company for those mistakes and for the slowdown in growth. Etsy stock is now down 79% from its peak in 2021, and it has continued to slide this year even as a number of other e-commerce stocks like Amazon have rebounded.
However, there are signs Etsy could soon return to growth. After several quarters of declines for its active seller and buyer counts, it has returned to growth in both categories. On Etsy Marketplace, the core business, it added approximately 400,000 active sellers in the second quarter, representing sequential growth of 7% and bringing the total to 6.3 million. It also added about 700,000 buyers in the quarter to bring the total to 90.6 million. That should help drive an improvement in gross merchandise sales and revenue.
Meanwhile, the company remains strongly profitable with an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 26.4% in its most recent quarter.
If revenue growth starts to accelerate, the stock should respond well as there's still a large addressable market for Etsy to penetrate.
One of the best bargain buys today
Jennifer Saibil (Ulta Beauty): Now's a great time to buy consumer goods stocks that have strong track records of growth and profitability but have lost some investor confidence due to the impacts of high inflation. A low share price now can lead to solid gains later, especially for quality stocks facing short-term headwinds. Ulta is a great example, and at 31% below its all-time high, investors should buy on the dip.
Ulta operates a popular beauty store chain that has changed the entire industry. It offers a mix of premium and mass-market brands, tapping into the needs and demands of its customers through both physical stores and an online presence. It has become a leading player in the industry with nearly $11 billion in trailing-12-month sales.
Revenue growth remained in the double-digits in the fiscal 2023 second quarter, and comparable sales were up 8%. While that's a definite slowdown from previous quarters, it's an impressive showing under these economic conditions. Earnings per share also rose 6% year over year to $6.02, beating the consensus analyst estimate of $5.85.
Inflationary pressure is taking its toll on profitability, though, as operating margin in the fiscal second quarter shrank 150 basis points to 15.5%. Management updated its full-year outlook with small increases to sales, comps, and operating income, but investors weren't impressed after the company had already lowered its operating margin guidance in the previous quarter.
But Ulta's operating margin is still higher than pre-pandemic levels, and it should improve with macroeconomic conditions overall. At the current price, Ulta stock trades at a price-to-earnings ratio of only 15. That's a low valuation for a company with this level of growth and profitability. At this price, it's a no-brainer stock to buy.
Invest in a growing $6 trillion market
John Ballard (Shopify): The e-commerce market might have slowed a bit over the last year amid rising inflation and interest rates, but it remains a massive and growing market expected to exceed $6 trillion this year. Businesses of all sizes will have to continue investing in software solutions to manage their online sales channels and storefronts. This is a long-term tailwind for Shopify, which offers services to merchants to manage payments at checkout, pay bills, and grow their businesses online.
The stock has rallied 35% year to date, but it's still 72% off its all-time high. As artificial intelligence (AI) has emerged as a driving force in the market this past year, Shopify is positioned to benefit from investments in this technology. It recently introduced new AI tools, such as Shopify Magic and Sidekick, which help merchants make better decisions in running their businesses.
Shopify's powerful platform of solutions appears to be picking up where it left off before the stock tumbled last year. Revenue grew 31% year over year in the second quarter, largely driven by its merchant solutions business, which is benefiting from strong growth for Shopify Payments. Management expects full-year revenue growth to land in the low-20% range. More growth will surely lift the stock higher over the long term.
Shopify can maintain double-digit growth for a long time, given that its gross merchandise volume across its merchant base was just $55 billion in the second quarter, an annual run rate of $220 billion. That's still a small share of a large and growing e-commerce market.
The recent deal with Amazon that lets merchants offer free shipping to Prime members through Shopify checkout could grow into a large opportunity. Given the momentum and opportunities ahead, the stock should be a rewarding investment at its beaten down price.
