Updated: Nov 29, 2021
In this article, I am going to take a look at 5 stocks that I believe offer a good risk vs reward at current valuations.
Rather than looking at stocks that have run up a lot recently, I am going to take a look at stocks which I believe could be timely buys with the intention of holding for the long-term. Just to be clear, I believe that all of the stocks referenced are high quality companies and this is not about trying to time the market. The price you pay ultimately results in the return that you will achieve.
As always, this article does not represent investment advice and is designed to act as a starting point for you when doing your own due diligence. For disclosure, I hold long positions in all of the stocks referenced in this article.
Square, Inc (Ticker: SQ)
Square, Inc can be best described as a commerce ecosystem. The Company enables its sellers to start, run and grow their businesses. It combines software with hardware to enable sellers to turn mobile devices and computing devices into payments and point-of-sale solutions. The tools help sellers make informed decisions through the use of analytics and reporting. The company can be viewed as two significant ecosystems namely the Seller Ecosystem and the Cash App Ecosystem.
Why Invest Now?
The overall Square share price has been pretty flat over the past 12 months but it’s price to sale ratio has halved.
Square released Q3 2021 earnings recently and the headline was that it missed Wall Street revenue estimates by 13%. The following day the share price closed down 4%. You might assume that this meant the company reported a really bad quarter. However, when you dig into the financials you will realise that the revenue miss was entirely due to Bitcoin revenue which is really low margin. For every $100 of Bitcoin transactions that Square processes it only pockets $2. As a result, Square only missed the gross profit estimate by 2%. Further to this, Square improved its overall gross margin from 26% at Q3 2020 to 29% at Q3 2021 meaning that it is growing its higher margin products and services faster. In my view the reaction to Square’s Q3 earnings epitomises the need to really understand the underlying earnings report rather than simply looking at the headlines and price action which are designed to be controversial and grab attention.
Sea Limited (Ticker: SE)
Sea Limited is a leading global consumer internet company founded in Singapore. Their mission is to better the lives of consumers and small businesses with technology. The company operates three core businesses across digital entertainment, e-commerce, as well as digital financial services, known as Garena, Shopee, and SeaMoney, respectively.
Why Invest Now?
I don't think there is ever a bad time to invest in Sea Limited. The stock is not exactly cheap but its execution is exceptional. The recent market correction means that Sea now trades at over 20% below its all time high and just above the 200 day moving average.
For the past month, Shopee has been busy launching in a number of European countries including Poland, Spain and France. This expansion is really promising. Sea’s core markets of South East Asia and Latin America are already fast growing with mobile first and internet economies expanding rapidly.
Secondly, Sea’s Q3 earnings were really impressive. The company beat Wall Street revenue estimates by 9% and also raised guidance for Q4. Delving deeper, gross margins improved across all three segments and key operating metrics such as QAUs and GMV continue to grow.
MercadoLibre (Ticker: MELI)
MercadoLibre hosts the largest online commerce and payments ecosystem in Latin America. Their efforts are centered on enabling e-commerce and digital and mobile payments on behalf of its customers by delivering a suite of technology solutions across the complete value chain of commerce. The company is present in 18 countries including: Argentina, Brazil, Mexico, Colombia, Chile, Venezuela and Peru. Based on unique visitors and page views MercadoLibre are market leaders in each of the major countries where we are present.
Through their online commerce platform and related services, MercadoLibre provide its users with robust online commerce and payments tools that not only contribute to the development of a large and growing ecommerce community in Latin America (a region with a population of over 635 million people and one of the fastest-growing Internet penetration rates in the world), but also foster entrepreneurship and social mobility. Their main focus is to deliver compelling technological and commercial solutions that address the distinctive cultural and geographic challenges of operating an online commerce and payments platform in Latin America.
Why Invest Now?
The share price for MercadoLibre has been trading flat for the past 12 months but it’s price to sale is currently at its lowest since the pandemic hit in March 2020.
Since Q2 2020, MercadoLibre has reported 6 consecutive quarters of revenue growth of at least 60%. The company is also guiding for 55% growth in Q4 and 36% for full year 2022 despite the tough comparatives. The gross profit is trending in line with this revenue growth with a healthy gross margin of 43%. On top of its strong financials, growth prospects and valuation MercadoLibre has one of the strongest infrastructure and logistics networks that is keeping it ahead of competitors.
Airbnb (Ticker: ABNB)
Airbnb is a company that operates an online marketplace for lodging, primarily homestays for vacation rentals, and tourism activities. Since it was founded in 2007 it has grown to 4 million hosts who have welcomed over 800 million guest arrivals to approximately 100,000 cities in almost every country and region across the globe. Hosts on Airbnb are everyday people who share their worlds to provide guests with the feeling of connection and being at home.
Airbnb’s hosts are the foundation of the community and business. Stays are made possible by hosts. It is their individuality that makes Airbnb unique. From schoolteachers to artists, hosts span more than 220 countries and regions and approximately 100,000 cities. Airbnb enables hosts to provide guests access to a vast world of unique homes and experiences that were previously inaccessible, or even undiscovered. The role of the host is about more than opening their door. A great host enables guests to find a deeper connection to the places they visit and the people who live there.
Why Invest Now?
Airbnb went public almost one year ago in December 2020 and was one of the most highly anticipated IPOs in recent years. This anticipation was reflected in the share price skyrocketing. From May onwards the stock built its post-IPO base before rising on the back of Q3 earnings.
During its most recent financial results, Airbnb recorded revenue of $2.24 billion. This was a new quarterly record and represented an increase of 67% year-over-year. This also surpassed the Q3 2019 pre-covid revenue by 36%. Gross margin was 86.1% in Q3 2021 compared to 83.1% in Q3 2020. One of the main bull cases associated with Airbnb is the ‘work from anywhere’ trend. The world is undergoing a revolution in how we live and work. Technologies like Zoom make it possible to work from home. Airbnb makes it possible to work from any home. This newfound flexibility is bringing about a revolution in how we travel. Airbnb is the ideal stock to capitalise on this trend.
Roku (Ticker: ROKU)
Roku is the leading TV streaming platform in the U.S. by hours streamed. The company pioneered streaming to the TV and was founded on the belief that all TV content will be streamed. The re-platforming of the TV ecosystem is underway and is creating more options for consumers, content publishers, advertisers and other industry participants. TV streaming is now mainstream and consumers are spending more time watching TV streaming services, with many ‘cutting the cord’ from legacy pay TV services entirely. Central to the platform is the Roku operating system (“Roku OS”).
Why Invest Now?
The Roku share price has fallen off a cliff over the past four months and is currently trading over 50% below the all time high. These sorts of moves are not unusual, the stock price has fallen over 40% from the all time high on four separate occasions since 2018.
Roku is often misunderstood as a cheap hardware provider. In reality the hardware is simply a trojan horse to get inside your home. Once inside, Roku leverages its platform and operating system to generate high margin revenue. We're still early in the streaming revolution, and Roku is still growing. During Q3, Roku grew revenue by 51% and Average Revenue Per User (ARPU) has increased by over 49% to $40.10. The negative sentiment is due to player revenue declining 26% during the quarter. Management cited global supply chain issues as well as tv sales in the US having dropped back to pre-covid levels which isn’t surprising. Overall revenue increasing 51% despite the hardware sales declining 26% shows how strong the platform is.
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