The U.S. stock market performed well over the past year. The broad-based S&P 500 advanced 28%, the blue chip Dow Jones Industrial Average gained 18%, and the technology-heavy Nasdaq Composite soared 39%. But patient investors can still find buying opportunities on a budget.
For instance, Cloudflare (NET +1.83%) and Shopify (SHOP +3.32%) trade at reasonable valuations given their future growth prospects, and both stocks were priced at less than $100 per share at the time of writing.
Here's what makes these businesses worthwhile investments.
NYSE: NET
Key Data Points
1. Cloudflare
Cloud computing specialist Cloudflare provides a broad range of application, network, and security services that accelerate and protect corporate infrastructure and applications across private data centers and public clouds. It also offers compute and storage services through its Workers development platform that empower businesses to build and run applications on its network.
Cloudflare has achieved a strong presence in several relevant verticals due to unparalleled speed and immense scale. It operates the fastest cloud network on the market, and it handles about 20% of all web traffic. That last fact creates an important network effect. The machine learning models that power its platform are continuously fine-tuned using vast amounts of data gleaned from across the internet, improving their ability to route traffic and block threats.
Cloudflare reported excellent financial results in the fourth quarter. Customers rose 17% to 189,791 and the average client spent 15% more. In turn, revenue increased 32% to $362 million and non-GAAP net income jumped 148% to $53 million. Management said close rates and average deal size improved markedly compared to the previous quarter, meaning the company is making progress on improving sales force productivity.
Going forward, Cloudflare has particularly compelling opportunities in developer services and network security services. Forrester Research has called the company a leader in edge development platforms, and International Data Corp. has recognized its leadership in zero-trust network access, citing threat-detection capabilities as a key strength.
With that in mind, the edge computing market is expected to compound by 37% annually through 2030, and the zero-trust security market is forecast to grow by 17% per year during the same period. Meanwhile, Wall Street expects the company to increase sales by 25% annually over the next five years.
That forecast makes Cloudflare's recent valuation of 25 times sales appear tolerable. Patient investors should consider buying a small position in this growth stock today, with the understanding that shares could be volatile in the near term.
NASDAQ: SHOP
Key Data Points
2. Shopify
Shopify offers software and services that help merchants manage their businesses across physical and digital storefronts. Its software integrates with e-commerce marketplaces like Amazon and social media like TikTok, as well as direct-to-consumer websites and mobile apps. Ancillary services include financial solutions, fulfillment support, and tools for cross-border commerce and wholesale.
Shopify reported strong financial results in the fourth quarter, beating estimates on the top and bottom lines. Sales increased 24% to $2.1 billion due to strong growth in subscription and merchant services revenue. Meanwhile, non-GAAP net income more than quadrupled to reach $441 million due to cost-control efforts, including head count reductions and the sale of its capital-intensive logistics business.
Shopify shares fell following the fourth-quarter report as a result of light guidance, but investors should view the pullback as a buying opportunity. Shopify is the market leader in e-commerce and omnichannel commerce software, and the second-largest e-commerce company in the U.S. That tells me Shopify is ideally positioned to benefit as consumers spend more online. Indeed, the company ranked no. 16 on the Fortune Future 50 List for 2023, an annual evaluation of the world's largest companies based on their long-term growth prospects.
Beyond retail, Shopify has added wholesale e-commerce tools to its enterprise-grade platform, Shopify Plus. That significantly expands its addressable market because wholesale e-commerce sales exceed retail e-commerce sales by a factor of three. While it's too soon to make any firm judgments, Shopify reported strong momentum in wholesale last year, with gross merchandise volume climbing nearly 150% in the fourth quarter.
Going forward, Grand View Research expects retail e-commerce sales to grow by 11% annually through 2030, while wholesale e-commerce sales are forecast to increase by 18% per year during the same period. But Wall Street expects Shopify to expand more quickly. The consensus among analysts calls for annual revenue growth of 22% over the next five years. In that context, its current valuation of 14 times sales seems quite reasonable. Patient investors should feel comfortable buying a small position in this growth stock today.
