With the S&P 500 now down just 1% from its record level, the benchmark index could be on the verge of reaching a new peak and ushering in the next sustained bull market.
But while the index has posted impressive gains across this year's trading and is teetering on entering a new bullish phase, the S&P 500's big rally this year has largely been driven by megacap tech stocks with premier positions in artificial intelligence -- such names as Nvidia, Microsoft, Alphabet, Meta Platforms, and Apple.
But when the next bull market with legs hits, there's a good chance that high-quality stocks which still trade down big from previous highs will bounce back and deliver strong performance. With that in mind, read on to see why two Motley Fool contributors think that investing in these top companies would be a great move now.
SoFi stock: Down 61% from its high
Jennifer Saibil: I was wary of the hype surrounding SoFi Technologies (SOFI 3.69%) when it went public through a merger with a special purpose acquisition company (SPAC) in June of 2021. It was untested, with an astronomical valuation and no profits. I'm not surprised the stock fell off a cliff in the bear market.
Since then, however, several things have happened. Growth remains high, but the valuation has declined and profits are improving. And that's just the very top layer of the story.
SoFi's one-stop shop for digital financial services is resonating with its core customer base of students and young professionals. It acquired Golden Pacific Bancorp in 2022, and with it, a bank charter. It now offers a full suite of services like bank accounts and credit cards.
It's focused on providing an easy-to-use interface with low fees and high rates, and as members join and have a positive experience, they're adding more services. That's leading to scaling up without significant extra marketing costs and thus improved profitability.
In 2023's third quarter, revenue increased 27% year over year, a slowdown from previous quarters. But it added 717,000 new members, a 47% year-over-year increase (an acceleration) and more than 1 million new products.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 121% to $98 million. That's how SoFi has been measuring profitability, and it's important to watch the movement in this metric.
But it's also important to note progress in its path toward net profits, and how well it's generating cash. Its net loss actually ballooned in the quarter due to a goodwill impairment, but management reaffirmed that it will reach net profitability in the fourth quarter. As for cash, since SoFi now has deposits in addition to its original lending products segment, it has plenty of cash to run its business.
At the current price, the stock trades at a price-to-sales ratio of 4.6. While not objectively cheap, it's a valuation that takes SoFi's phenomenal growth into account. At this point in the story, SoFi has demonstrated that it can keep up the momentum in revenue while driving profitability.
It looks like we're right around the corner from a bull market, and SoFi is the kind of growth stock that thrives in positive market conditions. If it begins to report net profits, expect the stock to soar in 2024.
Airbnb stock: Down 32% from its high
Keith Noonan: While Airbnb (ABNB 0.75%) stock has seen some volatile swings since going public in December 2020, the company has generally continued to post very encouraging business results. Revenue grew 18% year over year to reach $3.4 billion in the third quarter, and adjusted net income surged 33% to reach $1.6 billion and deliver a 47% net income margin.
Meanwhile, the business has now generated $4.2 billion in free cash flow (FCF) over the trailing-12-month period, coming in at roughly 44% of total sales across the period. That's a fantastic margin, and it points to the potential for the stock to deliver impressive returns for investors who take a buy-and-hold approach at today's prices.
With a market capitalization of roughly $95 billion, Airbnb is valued at less than 23 times its trailing FCF. Given that the business is posting such strong margins and still growing revenue at a solid clip, the rental-platform leader's valuation continues to look attractive for long-term investors.
Airbnb's growth story is likely just getting started. Total active listings on the platform grew 19% year over year in the third quarter, and management continues to make smart moves to ensure that its platform is appealing to both property hosts and guests.
A growing number of listings on the platform should help ensure that a wide variety of offerings across a wide range of price points is available. Boosting active listings will likely also be a key catalyst in driving the work-anywhere, live-anywhere trend that remains an underappreciated contributor to the platform's long-term expansion potential.
With the stock still trading off 32% from the valuation peak that it reached in February 2021, Airbnb looks poised to deliver plenty of long-term upside and stands out as a smart buy for investors seeking growth at a reasonable price.
