If you want to find the big companies of tomorrow that could dramatically change your financial situation, look for companies that consistently show high rates of revenue growth. All of the blue chip stocks that brought in millions to early investors were once fast growing upstarts.
Three Motley Fool contributors came up with three promising ideas to make your search easier. This is why they believe JD.com (NASDAQ: JD), Etsy (NASDAQ: ETSY), and Pinterest (NYSE: PINS) should continue to offer big returns.
An undervalued e-commerce stock
John Ballard (JD.com): JD.com is the largest retailer in China. It declared $ 114 billion in revenue for 2020, and revenue has more than tripled in the past five years. The stock rose accordingly, but recent Chinese regulatory oversight on internet companies pushed the stock price well beyond its 52-week high of $ 108. Based on JD.com’s physical presence in China and increasing margins, this could be a great opportunity to buy shares in one of the world’s leading e-commerce companies.
China’s regulatory environment has always been a risk, but this time around, the sell-off of Chinese tech stocks seems overdone. The recent regulators’ investigation targeted so-called “platform” business models that primarily conduct business online, which does not fully describe JD’s business. During JD’s second quarter earnings call, management explained that the company’s long-standing practice of doing business “the right way” and its physical presence of more than 23 million square meters warehouses across China are expected to keep it in good standing with regulators.
âWe believe the regulatory goals are conducive to JD’s long-term business growth,â CEO Lei Xu said on the call.
Indeed, JD.com seems well positioned for continued success. In addition to its online presence, it operates a network of tens of thousands of physical stores, including pharmacies, supermarkets, convenience stores, and auto service centers. It is a well-established company that is going nowhere, with nearly 400,000 employees in its subsidiaries and affiliates.
In addition, management has done an excellent job of improving operational efficiency in order to increase margins. In the second quarter, the adjusted operating margin improved year over year to 3% from 2.2%. This translated into a 64% increase in adjusted earnings per share in the second quarter.
JD’s margin in most sales categories is consistently lower than its competitors, providing a substantial advantage for greater profit growth. The company saw a 26% increase in sales and added a record number of new active accounts in the second quarter. With a valuation of 0.95 times sales, JD.com is trading at a significant discount to other major ecommerce stocks and should be a great investment.
A huge opportunity in e-commerce
Jennifer Saibil (Etsy): You don’t have to love handmade products to be an Etsy fan. The online market for exclusive and vintage items saw its sales skyrocket during the pandemic, and its inventory soared, gaining nearly 300% in 2020 alone. Sales and gross merchandise volume increased by triple digits year over year for most of 2020, and it has added millions of buyers and sellers to its platform.
As global restrictions ease, this phenomenal growth is starting to slow. In the second quarter, sales increased 23% year-over-year and gross merchandise sales, or GMS, increased 14%. But Etsy was still able to post double-digit growth despite last year’s tough comps. It is quite amazing. It remains a high growth company with a market opportunity of $ 1.7 trillion and is showing a profit.
Here are a few metrics that should help convince yourself that Etsy is still a great buy: Not only did it retain its millions of new pandemic customers, but active buyers grew 51% year over year in the second quarter. and repeat buyers increased 115%. Buyers are also more active, with an increase of 22% in average GMS per buyer compared to 2020. GMS per new buyer is accelerating and it increased by 24% in the second quarter.
The pandemic has ushered in a new era for the creative market, and Etsy is catching up with new features and plans. It encourages sellers to post videos, which boosts customer engagement on social media channels, and its tools help sellers deliver more accurate expected delivery times. It is also developing through acquisitions, which strengthens its strengths, and it remains profitable.
Etsy stock slows in 2021 after its remarkable rise last year, but is up nearly 14% since the start of the year. It’s not cheap, trading at 59 times earnings over 12 months. But that’s low enough for a growth stock.
Etsy has so many opportunities ahead, and a post-pandemic deceleration shouldn’t blind investors to the kind of investment Etsy could be.
This social media platform increases cash flow from operations
Parkev Tatevosian (Pinterest): Pinterest is an image-based social media platform that allows users to âpinâ images to their profiles and create custom boards. For example, I have a boy’s haircut chart with pictures of different types of cuts that I let my son choose from when I take him for a haircut. The use cases are broad and help attract millions of users to the platform.
Indeed, Pinterest has 454 million monthly active users, or MAUs, up 5% from the previous year. The company saw a wave of new registrations during the pandemic, as people locked in the home spent more time on their phones, tablets and computers. From its second fiscal quarter 2020 to the first fiscal quarter 2021, Pinterest added MAU 62 million. The company has since lost MAU 24 million as economic reopenings have drawn people out of their homes and away from their computers.
Nonetheless, management stressed that these are the least engaged users and this has not affected revenue growth. And revenues were up – exploding 125% from the same quarter last year. Management expects revenue growth to slow in the next quarter to 40%. In the long term, Pinterest is still in the early stages of expansion. It was only recently that it started to focus on monetizing its international user base.
The average revenue per user, or ARPU, was $ 5.08 in the United States and only $ 0.36 internationally. As it strengthens its international sales teams, expands its advertiser coverage, and improves its serving of relevant ads, the international ARPU can close the gap with the United States.
It is important to note that rapid revenue growth leads to growth in cash flow from operations. Over the past four years, cash flow from operations was minus $ 103 million, minus $ 60 million, $ 1 million and $ 29 million. Additionally, in the past 12 months, Pinterest has generated $ 383 million in the metric. By buying the stock now, your portfolio could experience equally explosive growth over the long term.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.