Markets are rallying this year, but two of the most promising growth stocks have been left far behind. I'm talking about e-commerce player Etsy (ETSY 0.34%) and telemedicine leader Teladoc Health (TDOC -2.40%). These stocks have dropped in the double digits, even as they've reported encouraging news in their earnings reports.
Of course, Etsy and Teladoc have faced challenges in recent times, which initially weighed on their stocks. But it's important to look at the long-term picture. This view, along with today's dirt cheap prices for these stocks, makes them top buys right now. Let's take a closer look at these potentially explosive stocks you'll want to get in on in December.
Image source: Getty Images.
1. Etsy
You may be familiar with Etsy if you've ever shopped online for handcrafted gifts. The platform allows makers of these items to set up shop, and then connect with potential buyers. In early pandemic days, Etsy's business soared as people favored online shopping. But in recent times, a tough economic environment has weighed on wallets, and people have favored buying essentials over discretionary items. This has hurt Etsy.
But it's important to consider how Etsy is managing through these tough times and take a look at the future too. In the most recent quarter, the e-commerce company reported solid profitability, about a 1% gain in gross merchandise sales, and 4% growth in active buyers. In fact, active buyers reached a record high of 92 million.
Even better, habitual buyers have remained stable at about 7 million this year. Stability or growth here is particularly important because these customers, the loyal ones who keep returning to Etsy, offer us some visibility on future revenue.
I also like Etsy's capital-light business model, which helps it transform 90% of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) into free cash flow. Unlike many other e-commerce companies, Etsy doesn't have to invest in storage and transport infrastructure, and this offers it financial strength. Speaking of financial strength, Etsy has $1.1 billion in cash, and is so confident in its business that it recently bought back shares.
You might want to buy some shares too, considering that they trade for the bargain basement valuation of 17x forward earnings estimates.
2. Teladoc Health
Teladoc was another winner of the early days of the pandemic as people preferred online medical visits to in-person ones. At the same time, the company invested aggressively in growth, even buying chronic care specialist Livongo -- in a deal that eventually resulted in billions of dollars in goodwill impairment charges. Those charges and a general market slowdown weighed heavily on Teladoc shares.
But there's reason to be optimistic about the company today and load up on the stock at a bargain price. Earlier this year, Teladoc set to work on a plan to balance its quest for growth with the quest for profitability. It focused on efficiency and cautiously investing in the most promising growth areas.
So far, the plan is working. In the most recent quarter, Teladoc reported results that either met or beat expectations, and free cash flow, after falling last year, has been on the rise.
Although the purchase of Livongo may have been costly for Teladoc, this investment in chronic care could eventually pay off. In the quarter, rising enrollment in chronic care programs -- now at more than 1.1 million active users -- drove revenue gains. And a better cost structure and focus on efficiency helped boost adjusted EBITDA and margins.
Now, Teladoc is taking things a step further by launching a "comprehensive operational review" of its business -- to favor investments only in the most compelling areas and to fine-tune the company's cost structure to ensure maximum efficiency.
Today, Teladoc shares are trading for about 1.2x sales, their lowest ever by this measure. That's a dirt cheap level for a stock that could generate explosive gains down the road.
