If you're a shareholder of manufacturing platform Xometry (XMTR -0.54%), restaurant company Portillo's (PTLO 1.74%), or enterprise education business Udemy (UDMY 0.89%), it's been a rough first half of 2024. All three of these stocks are down and among the worst performing stocks on the market.
What's more is that S&P 500 is enjoying a stellar first half of the year. Therefore, the respective drops of 67%, 41%, and 42% for Xometry, Portillo's, and Udemy look pretty bad in comparison to the nearly 16% gain for the S&P 500.
However, I don't believe shareholders should despair. To the contrary, I think Xometry, Portillo's, and Udemy could be in for a much better time in the back half of 2024. And even if these stocks fail to gain this year, they're still poised for better returns over the long haul. Here's why.
1. Xometry
Xometry is a digital platform that connects manufacturing shops with businesses that need work done. And it can be a winner because of its technology and the size of its market opportunity.
When a business outsources manufacturing, it needs the process to be fast. With Xometry's platform, businesses can upload schematics for what they need done. And Xometry's artificial intelligence (AI) software analyzes the job and provides instant pricing -- how's that for fast? It also offers software to the manufacturing shops to assist getting the job done.
I'm personally not a Xometry customer so I can't provide first-hand insight into the user experience. Therefore, I look for clues as to whether businesses like using it. Here's one data point to consider: Xometry has nearly 60,000 active buyers as of the first quarter of 2024. That's more than one of its top competitors, Protolabs.
However, Protolabs was founded way back in 1999 whereas Xometry only started in 2013. Considering Xometry is much younger and already has the larger customer base, I'd say this suggests that its customers like the platform's technology.
Xometry points out that the manufacturing space is a $2 trillion opportunity. Realistically, however, the company won't address the entire market. But considering its trailing-12-month revenue is less than $500 million, even addressing a fraction of its market would provide plenty of upside opportunity for the business. And if its technology is truly good enough to attract new customers, then it's reasonable to expect long-term growth from this small-cap stock.
2. Portillo's
Restaurant stock Portillo's has dropped so much that shares now trade at an inexpensive price-to-trailing-sales ratio of 1. For perspective, the valuation of Darden Restaurants is double this and the valuation of Texas Roadhouse is triple.
PTLO PS Ratio data by YCharts
If Portillo's were a bad business with bad prospects, then investors shouldn't buy the stock no matter how cheap it is. But this doesn't seem to be the case at all. To the contrary, I believe Portillo's is a great business with a compelling growth opportunity.
The average Portillo's location does $9 million in sales volume annually -- that's more than top restaurant company Texas Roadhouse. And because its restaurants have such high sales volume, the company is easily profitable. Portillo's had an operating margin of 6% in the first quarter of 2024, which isn't bad for a restaurant company.
Regarding its opportunity, Portillo's only had 86 locations as of May 7. But the company expects to grow its number of locations by 12% to 15% annually for the foreseeable future, which is a compelling upside opportunity for a profitable company and a cheap stock.
3. Udemy
Anyone can go to Udemy's education platform to learn. But increasingly, businesses are subscribing to the platform to provide their workers with resources to learn new skills without fussing over official degrees. In the first quarter of 2024, 60% of Udemy's revenue was from its Udemy Business segment, showing that this is the core business now.
I believe that this is a special situation. Many investors might not be attracted to Udemy after looking at the surface numbers. But there are signs that better numbers are ahead.
For starters, Udemy's Q1 revenue was only up 12% year over year. But revenue for the Udemy Business segment was up a whopping 24%. Moreover, the gross profit margin for this segment was 72% compared to a gross margin of only 61% for the overall business.
In other words, Udemy Business is more profitable than the consumer side of its platform. And because it's faster-growing, the company's profits could look better in coming years. For perspective, it had a Q1 net loss of $18 million, which isn't great.
Udemy could be a profitable business as its subscription enterprise product continues growing. But it will likely become profitable for another reason as well. Historically, the platform has paid its independent instructors 25% of its subscription revenue. But as of Jan. 1, it's only paying 20% and it plans to drop it down to 15% by 2026. By paying out less, its margins should improve dramatically.
Once investors see that Udemy is capable of growth and profits, I believe the stock will start performing better. And since the platform just changed its payout structure, the turnaround could begin later in 2024.
As a closing caveat, six months is too short of a time frame to predict stock performances with any degree of certainty. So I can't guarantee that Xometry, Portillo's, and Udemy will perform better in the back half of the year. But with all three, I see a promising future ahead. And for that reason, I believe each will achieve better returns in the future.
