Investors navigated some challenging economic conditions in 2023, though you wouldn't know it by looking at the solid 19% gain in the benchmark S&P 500 index. A group of the world's largest companies carried the broader market higher this year, but there is still weakness beneath the surface.
Companies in the retail industry underperformed as elevated inflation and rising interest rates force consumers to tighten their belts. Many software companies also struggled as small and mid-sized businesses carefully managed their costs.
But circumstances could be very different in 2024. Inflation appears to have peaked, and Wall Street anticipates three interest rate cuts from the U.S. Federal Reserve during the year. That could reignite spending across the board, and bring relief to the companies that suffered most in 2023.
With that in mind, here are two heavily beaten-down stocks I think investors will buy in December in anticipation of a brighter year ahead.
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1. Sea Limited
Sea Limited (SE 0.05%) is one of the most consumer-focused technology companies in the world. It operates in three main industries: E-commerce, digital entertainment (gaming), and digital payments, all of which have slowed over the past year amid the pullback in consumer spending. However, Sea Limited also slashed its own costs recently to improve its bottom line, which is creating yet another drag on its sales.
E-commerce remains Sea Limited's largest segment. It generated $2.2 billion in revenue during the recent 2023 third quarter (ended Sept. 30), accounting for 67% of the company's total. It also grew by a modest 16% year over year, and while that's a positive in the challenging economic climate, it was substantially slower than the 32% growth rate it delivered in the same quarter of 2022.
But Sea Limited's gaming business is struggling even more. Its Garena development studio is responsible for popular titles like Free Fire and Call of Duty: Mobile. It experienced a surge in users -- both free and paid -- at the height of the pandemic, but they gradually tapered off as social conditions returned to normal. In Q3, Sea Limited reported 544 million quarterly active users for the segment, which was down year over year but flat sequentially, which signals a potential bottom.
However, the number of paying users continued to sink. The gaming segment's quarterly paying user ratio came in at 7.5%, which was a new low point since the pandemic-era peak of almost 13%. That led to a 33% year-over-year drop in revenue during Q3, in a clear sign consumers are still hesitant to spend money.
During the first nine months of 2023, Sea Limited delivered $9.4 billion in total revenue across all of its business units. That represented a modest 5% growth rate compared to the same period last year, but there's a huge positive beneath the surface.
The company lost $2 billion during the first nine months of 2022. But thanks to a substantial reduction in operating costs -- including a 35% reduction in marketing spending -- Sea Limited turned its fortunes around to deliver a $274 million profit in 2023 so far.
Yes, investing less money in new employees, marketing, and research and development added to the slowdown in the company's revenue. But Sea Limited is on track to enter 2024 as a profitable enterprise, and if consumer spending is reignited thanks to interest rate cuts, it could see a resurgence in revenue growth while also rapidly growing its bottom line.
Sea Limited stock is down 89% from its all-time high, and it's currently trading near its 52-week low. This could prove to be a great buying opportunity for investors.
2. Bill.com
Bill.com (BILL 3.21%) is a leading software provider to small and mid-sized businesses. Like Sea Limited, its stock also been crushed over the last couple of years as inflation and interest rates soared. Small businesses are on the front lines of the economy, so they're very sensitive to shifts in consumer spending. They tend to invest less money in upgrading their equipment, systems, and software when times are tough, which deals a blow to companies like Bill.com.
Bill.com's flagship platform features a digital inbox hosted in the cloud, which allows operators to aggregate all of their incoming invoices. From there, they can pay their bills with a single click, and synchronize each transaction with their bookkeeping software so records are always up to date. Bill.com also owns Invoice2go, which handles the other side of the payments equation. It can generate invoices for businesses, track incoming payments, and even help them run their payroll.
Divvy is another Bill.com-owned platform, which helps businesses budget their costs and track expenses, which is especially useful for organizations where multiple employees are using corporate credit cards.
Bill.com serves 471,200 customers across all three platforms, but that's a mere fraction of its addressable market, which includes 70 million small and mid-sized businesses around the world.
Bill.com invested heavily in penetrating that market at the expense of profitability over the last few years. But in light of the challenging economic climate, the company has been more careful with its expenses. In the recent fiscal 2024 first quarter (ended Sept. 30), its operating costs grew by just 12% year over year (with marketing spending actually falling), whereas its revenue grew by a much faster 32%.
That resulted in a bottom-line net loss of $27 million, which was a 65% reduction compared to the same period last year. Ultimately, Bill.com is on the path to profitability, which will make it a more sustainable business over the long term.
Small business spending could be reignited in 2024 if the economy improves. That might drive more revenue to Bill.com organically, and since it has trimmed its costs, a profitability surge could follow. With its stock trading 80% below its all-time high, I think savvy investors might consider this a great opportunity ahead of the new year.
