Even though the market is tepid toward all three stocks right now, share prices of Wex (WEX 0.72%), Zoom Video Communications (ZM 1.57%), and PubMatic (PUBM 1.75%) all have real potential to double in value.
For evidence of the market's tepid expectations, consider that the price-to-sales ratios of all three companies have dropped considerably in recent years. By contrast, stocks generating excitement have more expensive valuations, generally speaking.
WEX PS Ratio data by YCharts.
A given stock's valuation often has more to do with how investors are feeling at a given moment. But over the long term, profitable growth usually outweighs sentiment and can lead to good returns -- and that's what Wex, Zoom, and PubMatic can offer. Let's take a closer look at these three stocks to see why each can turn a $500 investment into $1,000 over time.
1. Wex
The largest part of Wex's corporate payments business is its fleet arm, which provides fuel cards to around 19 million fleet vehicles around the world. But the company also facilitates payments for corporate travel and provides software to help companies manage benefits. And overall, business for Wex has never been better.
That said, Wex's fleet card segment is struggling. It's impacted by lower fuel prices, which are a headwind for it.
According to AAA, the national average for gas was $3.25 per gallon as of this writing, down from $3.56 a year ago. Moreover, Wex's revenue guidance for the fourth quarter assumes gas prices of $3.80 per gallon. Therefore, it could fall short in Q4.
That said, the other two parts of Wex's business -- corporate payments for travel and benefits -- have picked up the slack in 2023. In the third quarter, revenue for corporate payments was up 19% year over year, and benefits revenue was up 34%.
In benefits, Wex is showing particularly strong growth. It's now the fifth-largest custodian in the U.S. for health savings accounts. And its benefits software is used by 45% of the top 20 custodians for health savings accounts.
Wex's business is diverse and sticky -- over 80% of its revenue is recurring. Revenue is at an all-time high, which led to record profitability as well. With things going so well already and with growth to come, this stock has what it takes to double.
WEX Revenue (TTM) data by YCharts.
2. Zoom Video Communications
My investment thesis for Zoom is simple. In the company's fiscal 2024 third quarter, its free cash flow (a measure of profitability) was up a stunning 66% year over year to $453 million. The company has generated positive free cash flows every quarter since it went public in 2019. As this continues, it will eventually lead to a doubling in the stock price.
There are, of course, counterarguments to the free-cash-flow thesis for Zoom. Some would say that its free cash flow is low quality, and assert that it's not poised to keep that metric positive. The perception is Zoom is past its peak, a situation that points to future declines in revenue and slumping free cash flow.
Those slides have yet to happen and the company hasn't posted a revenue contraction to date, even when it was lapping year-over-year growth of more than 300% in 2021. Moreover, its customer churn rate just hit its lowest level since the company went public. If anything, it looks like the foundation of this business is strengthening, which will support better growth in the future.
Some bears suggest Zoom's free cash flow is somewhat of an illusion. This metric can be improved when stock-based compensation expenses are high. And Zoom's are high, so there's an element of truth to this argument. Shareholders shouldn't applaud outrageously high stock-based compensation because it dilutes shareholder value.
However, dilution hasn't been a problem for Zoom. The company's outstanding share count is up by a mere 2% over the last three years, contradicting the bearish narrative.
ZM Average Diluted Shares Outstanding (Quarterly) data by YCharts.
Finally, some might believe that Zoom is merely using its free cash flow to repurchase shares and offset the dilution from stock-based compensation, making the entire thing a wash. This argument too isn't based on reality. Shareholders can simply look at Zoom's strengthening balance sheet to see that real value is being created. In Q3, the company was still debt-free, but its cash and investments increased to $6.5 billion from $5.4 billion in the prior-year period.
In summary, Zoom's free cash flow is real. And the company's ongoing growth over the long haul could eventually lead to a doubling of the stock price.
3. PubMatic
PubMatic is one of a handful of small-cap stocks presenting a wonderfully opportunistic buy today. It's still growing nicely under the surface, but that is not translating into revenue growth right now.
PubMatic is a software company that helps digital publishers sell their ad slots. To grow, the company needs new publisher customers, and it needs ad impressions from these publishers to go up. Both things are encouragingly happening right now.
At the start of this year, PubMatic served around 1,650 publishers. As of the end of the third quarter, it served about 1,750. One might view that growth of about 6% as modest. But these publishers are relying on PubMatic more and more -- its ad impressions were up 33% year over year in Q3.
Across the advertising technology space, companies are struggling because ad rates have gone down. PubMatic's revenue is up less than 1% this year as a result. But the business is growing nonetheless, and when ad rates rebound, its revenue could skyrocket.
While PubMatic waits for that ad rate recovery, it's still in a great spot. The business is profitable, it's debt-free, and it has $171 million in cash and cash equivalents on the balance sheet. In short, this is a stock that investors can feel relaxed about holding as they wait for it to rise.
Expect some volatility, but also expect stock price growth
It might not happen overnight, and its returns could be up and down. But these are three stocks that I still own because I believe they have realistic chances of doubling or more in the years to come.
