The current economic landscape, shaped by inflation and shifting consumer behaviors, presents both challenges and opportunities for investors.
Read on to see three of The Motley Fool's top tech experts dive into three stocks that are rewriting their narratives against the backdrop of these economic shifts. From C-suite makeovers to shifting long-term strategies, these undervalued turnaround stories have it all. Discover the resilience and innovative spirit driving these top-notch companies even while their stocks are available at rock-bottom prices.
NASDAQ: MQ
Key Data Points
This beaten-down fintech could expand its strong recovery
Billy Duberstein (Marqeta): The Federal Reserve appeared to pivot this week, with inflation coming down without significant job losses.
That ideal "soft landing" scenario was thought to be impossible over the past two years, decimating certain rate-sensitive sectors. But perhaps no sector suffered as much as the fintech sector. That's because fintechs generally carry both of the attributes that are heavily affected by interest rates. First, they are usually growth stocks that traded at high multiples prior to the 2022-2023 crash, and they're also economically sensitive as financial stocks dependent on spending and consumer financial health.
Card-issuing technology platform Marqeta (MQ 0.52%) has certainly taken its lumps, as the stock fell as low as $3.46 per share earlier this year in a dramatic plunge from its $27-per-share IPO price back in June 2021. While the stock has recovered to $6.49 as of this writing, I think there could be much more to go in a new "soft landing" bull market.
Marqeta's platform allows for a lot of new use cases for physical and virtual debit and credit cards. These include things like digital banking, buy-now-pay-later, on-demand grocery delivery services, early wage access, and other corporate expense management applications. So if the economy is able to grow as inflation comes down, spending activity should pick up.
In addition, Marqeta cleared several key milestones this year that make it primed for growth in 2024. First, the company has a new CEO in Simon Khalaf. After taking over in January for the company's founder during a slowdown, Khalaf has been able to identify new potential clients and reaccelerate Marqeta's bookings. Since new deals take about 12 to 24 months to ramp up and translate into revenue, Marqeta should see a total payment growth (TPV) acceleration in 2024 as a result.
Marqeta also renewed a key contract with Block (SQ +2.51%), which was a huge customer that accounted for 78% of Marqeta's revenue and over half its gross profit before the renewal. This summer, Marqeta renewed the contract to power Block's Cash App cards through 2027, then extended the contract through 2028 on the same terms in the frall, when it also renewed its contract for Block's Square merchant cards.
The renewal of course came with more favorable lower pricing for Block, as its volumes have greatly increased. So amid this "reset," Marqeta's gross profit fell 9% last quarter. However, now that the renewal is behind Marqeta, those numbers should improve throughout the year, reaching year-over-year growth in Q3 of 2024 when it laps the pricing reset from August. After that, revenue should reaccelerate toward TPV growth, which logged a strong 33% growth rate last quarter.
Marqeta also has a huge amount of cash on its balance sheet of about $1.3 billion, encompassing 38% of its market cap. That means the stock may be cheaper than it appears. As growth reaccelerates in the back half of next year, look for Marqeta to potentially rise back toward its IPO price over time.
NASDAQ: CRTO
Key Data Points
From retargeting to AI: Criteo's evolving business model
Anders Bylund (Criteo): France-based advertising technology expert Criteo (CRTO 0.93%) recently pulled off an ambitious strategy shift. Traditionally known as an ad retargeting specialist, helping websites and e-commerce hubs monetize their existing user relationships in new ways, Criteo has long worked to diversify its revenue streams. In the recently reported third quarter of 2023, retargeting services accounted for less than half of the company's total sales, for the first time ever.
It's a milestone years in the making. Criteo investors should breathe a deep sigh of relief to see that landmark moment in the rearview mirror, especially since Criteo got there in an organic way. Retail media sales rose 29% year over year in the third quarter along with a 31% jump in marketing solutions for e-commerce audiences.
"We've successfully moved our business from a single-solution retargeting play to a multi-solution platform offering -- end-to-end AI-enabled ad tech services with a focus on commerce," CEO Megan Clarken said on the earnings call.
That's not a bad place to be right now. Criteo uses deep learning and other artificial intelligence (AI) tools to optimize marketing outcomes for its customers. The company also enjoys a unique advantage in its unmatched collection of anonymized consumer data, which will come in handy when the online advertising market finally loses access to third-party cookies next year.
Criteo's privacy-respecting end-user data should play well with next-generation alternatives such as the Chrome browser's privacy sandbox. In other words, Criteo is poised to pounce when the digital ad market's deep, dark downturn finally breaks.
I expect a whiplash effect when ad buyers loosen their iron grips on those marketing-budget purse strings again. No one is launching major ad campaigns in an inflation-burdened era where consumers aren't ready to buy what you're selling. But development of new and improved products and services never stopped behind the scenes, creating a groundswell of pent-up demand for an effective advertising voice. Advertising optimizers like Criteo should enjoy record-breaking results as that imbalance between limited supply and soaring demand for online ad spaces plays out in 2024 and beyond.
Yet, Criteo's stock price has actually fallen more than 5% this year, including a 28% drop in the last 6 months. Shares are changing hands at the bargain-bin valuation of 8.6 times forward earnings and 0.7 times trailing sales. I can't wait to see this spring-loaded stock come back to life in a healthier advertising market -- a natural offshoot of the incoming bull market.
NASDAQ: LSCC
Key Data Points
A small Intel and AMD competitor more than holding its own
Nicholas Rossolillo (Lattice Semiconductor): Field programmable gate array (FPGA) chips are a growing necessity as industrial and automotive digitalization accelerates. What's an FPGA? It's a type of chip that can be reprogrammed after install in a computing system (or reprogrammed in the "field"). The flexibility inherent in these little chip units makes them a go-to especially in applications like industrial AI and manufacturing automation equipment, as well as in the modern car where more electronics are being crammed in by the year.
If "FPGA" sounds familiar, perhaps it's because the inventor and market share leader in FPGAs, Xilinx, was acquired by AMD (AMD +1.21%) in early 2022. Intel (INTC 3.60%) likewise acquired a couple of FPGA leaders in the second half of the 2010s.
After all that consolidation, the last FPGA pure-play stock left standing is small chip designer Lattice Semiconductor (LSCC 0.64%). Since CEO Jim Anderson took over in 2018, a former executive at none other than AMD, Lattice has become a high-revenue-growth and profit-margin-expansion story.
Data by YCharts.
Besides work to solidify its core portfolio of FPGA designs, Lattice has been a beneficiary of the FPGA market consolidation. Whenever there are big mergers and acquisitions like what Intel and AMD pulled -- which often means "synergies" are sought, or cost-cutting initiatives -- it leaves the door open for smaller peers to capture some market share. Additionally, as of late, Anderson and the top team have taken the opportunity to launch products into new product categories for Lattice, like data center AI.
Nevertheless, some of Lattice's core industrial end markets in industrial equipment have hit a soft patch as of late. The stock has tanked as a result, setting up what looks (to me at least) like a great buying opportunity in 2024. Shares trade for just under 40 times trailing-12-month free cash flow, the cheapest the stock has been in years.
That isn't to say the stock is "cheap." However, I believe Lattice's days of growth and higher profit are far from over, so I'm going shopping as the next bull market -- one especially favoring AI, industrial automation, and vehicle technology -- gets rolling.
