We are officially heading into the second year of the bear market. Businesses around the world are feeling the pinch as consumers and trading partners tighten budgets as 2023 approaches. A recession is possible and inflation remains a lingering concern for many.
Eventually, this bear market will end and the best companies that have managed the economic downturn will shoot higher. Three of these companies whose shares have fallen by at least 50% are The trading post (TTD -1.44%), Year (YEAR 1.63%)and Sea (SE -0.70%). Here’s why three Fool.com contributors think they’re buying before the next bull market begins.
A top game in digital ads, in good times and bad
Nicholas Rossolillo (The trade office): The digital advertising industry is in disarray at the end of 2022, but The Trade Desk is doing very well. The sluggish economy is blunting marketing budgets. In addition, ApplePrivacy changes — users can now turn off app activity tracking, which advertisers use to target the right audience for their promotions — are also hurting the digital ad space. While many software companies that help with ad feed have seen a big drop in revenue, The Trade Desk is doing well.
Specifically, Q3 2022 revenue soared 31% to $395 million. And the outlook for the fourth quarter implies growth of at least 24%, at $490 million or more.
Growth in a tough economy is all well and good, but what makes The Trade Desk “incredible?” As a demand-side advertising platform (it connects marketers with publishers listing ad time for sale), the company faces significant competition in the form of Alphabetit’s google, Metaplatforms‘ Facebook, Amazonmajor internet service providers, and more.
And yet, The Trade Desk has differentiated itself with an excellent software stack that makes it more of a partner for marketers, as opposed to a service provider. and competitor like the names above. Other big tech companies have conflicts of interest that could harm their ad agent clients, but that’s not the case at The Trade Desk.
Moreover, The Trade Desk generates a lot of profits, and it starts returning those profits to shareholders early on. Net earnings per share were just $0.03 last quarter (down from a year ago due to employee stock-based compensation). But on a per share basis (which takes into account the dilution of the stock-based composition), free movement of capital is booming.
After being crushed by the market this year, The Trade Desk is valued at just under 50x 12-month free cash flow. It’s a steep price, but I’m happy to pay given this company’s superior returns in the digital advertising industry. When this bear market ends, this activity could experience a massive surge.
Let me repeat: Roku is a screaming buy right now
Anders Bylund (Year): I am on you’ve heard that before. However, it is still true. Therefore, I repeat.
The media streaming tech veteran Roku is an obvious buy right now.
As of this writing, Roku shares are down 80% in 52 weeks and 50% in the past six months. The stocks are trading at eminently reasonable valuation ratios, such as 2.3 times trailing sells and 2.6 times the company’s book value.
And Roku faces huge growth prospects in a booming market. People all over the world are ditching their cable, satellite, and broadcast TV habits in favor of digital streaming options. Roku offers an incredibly user-friendly platform for streaming video content, with a market-leading footprint in North America and ambitious long-term plans for international growth.
Business is actually booming. Roku’s third quarter report showed a 16% year-over-year increase in the number of active users. Each customer also used their Roku-powered devices more often, resulting in a 21% increase in streaming hours and a 10% increase in average revenue per user (ARPU).
Keep in mind that most analysts and many investors viewed this report as a major disappointment. Share prices fell 18% the following day. But Roku’s biggest mistake was setting modest goals for the next quarter. The third-quarter numbers released beat Wall Street expectations across the board, with adjusted losses 31% below the consensus estimate on a 10% revenue surprise.
Roku continues to do almost everything right, paving the way for a massive recovery when the global economy gets back on its feet. Meanwhile, clear-eyed growth investors are taking advantage of this wide-open buying window. For example, Cathie Wood ARK Innovation ETF (ARKK -1.45%) picked up an additional 167,000 Roku shares after the third quarter report.
It’s a smart move, as long as you agree that digital streaming is the future of the media industry. I strongly recommend following Wood’s lead while Roku shares languish in the Wall Street trash.
A leader in high-growth markets on the horizon of profitability
Billy Duberstein (Sea Limited): Southeast Asia’s Sea Limited catapulted higher during the pandemic as its top three businesses in gaming, e-commerce and digital financial services were tailor-made for the pandemic era. During this period, Sea Limited posted stunning triple-digit growth rates – but also losses to its bottom line which were equally telling as it invested heavily in market leadership.
As we all know, the tides have turned in 2022. Rising interest rates have hurt valuations of unprofitable growth stocks, and Sea business growth has slowed as clients return to out-of-home business. . In addition, the dollar has strengthened, hurting the value of income and profits earned abroad.
After this perfect storm, it’s no wonder Sea Limited shares have fallen 74% this year. In fact, Sea Limited was actually much lower at one point, but recently rose almost 50% from its lows following its recent earnings report.
The recent rebound came as investors watched management deliver on promises made earlier in the year. In early 2022, Sea management shifted its mindset to focus on profitability as quickly as possible. With its profitable gaming segment stagnating and beginning to decline, while hit gaming Free fire matured, that meant moving its unprofitable e-commerce and fintech segments from losses to breakeven.
Nowhere is that more prominent than in its Shopee e-commerce platform, now Sea’s largest segment. At the start of the year, management set a goal to bring Shopee’s core Southeast Asian markets to breakeven on a EBITDA basis (earnings before interest, taxes, depreciation and amortization), before headquarters cost allocation, by the end of this year. Management achieved this one quarter early in the third quarter, with Taiwan and Malaysia posting positive EBITDA even with the inclusion of allocated headquarters expenses.
Shopee also posted pretty respectable revenue growth – 32.4%, or 38.8% in constant currency, that’s impressive, especially considering Shopee was running a quarter in which it grew 134.4%. at the end of the pandemic.
Meanwhile, Sea’s other unprofitable division, its SeaMoney digital financial services segment, continued its torrid growth. It rose 147.2% to $326.9 million, as its EBITDA loss narrowed 57.4% over the past year to just $67.7 million.
With management confirming its promises from earlier this year, this bodes well for its next target stated during the recent conference call. The target for Shopee and SeaMoney is to achieve overall EBITDA breakeven, including all allocated headquarters costs as well as the high-growth Brazilian market, by the end of 2023.
With $7.3 billion in cash, Shopee should have plenty of cushion to make it happen. Once the company reaches a point where overall profitability becomes more visible, this market-leading growth stock should pick up again.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Anders Bylund holds positions at Alphabet, Amazon.com and The Trade Desk. Billy Duberstein has positions in Alphabet, Amazon.com, Apple, Meta Platforms, Sea Limited and The Trade Desk and has the following options: short January 2023 $210 calls on Apple, short January 2023 $30 puts on Sea Limited, short January 2023 $80 puts on Alphabet, and short January 2024 $50 puts on Sea Limited. Its clients may hold positions in the stocks mentioned. Nicholas Rossolillo holds positions at Alphabet, Amazon.com, Apple, Meta Platforms and The Trade Desk. Its clients may hold positions in the stocks mentioned. The Motley Fool maintains and recommends Alphabet, Amazon.com, Apple, Meta Platforms, Sea Limited and The Trade Desk. The Motley Fool recommends the following options: long calls $120 in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.