The stock market is showing signs of cracking as worries about another wave of COVID-19 around the world and concerns about the delta variant in the U.S. take hold. The World Health Organization (WHO) has warned that we may already be in the early stages of a "third wave" -- cases have risen for four consecutive weeks since the second half of June, and the number of weekly deaths started increasing in the first half of July.
So what should you do if early signs of a stock market correction eventually turn into a full-blown crash? A market crash presents a great opportunity to buy some great companies at a discount. These companies may be trading at expensive multiples right now, but a temporary dive would make them more attractive to buy now and hold for the long run. Chewy (NYSE: CHWY), Twilio (NYSE: TWLO), and Apple (NASDAQ: AAPL) are three such stocks that should be on your radar in the event of a market crash.
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Chewy stock has been on fire since the beginning of 2020, as the pandemic forced people inside their homes, leading to terrific growth in online demand for pet products and supplies. The stock has gained around 185% since the start of last year, before pulling back in 2021. But the retraction might seem a little unjustified in light of the fact that Chewy has kept delivering high growth even after the reopening.
For instance, Chewy's Q1 revenue for the three months ending on May 2, 2021, shot up nearly 32% year over year to $2.14 billion. Its gross margin expanded 420 basis points over the prior-year period to 27.6%, and its adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) margin jumped 340 basis points year over year to 3.6%.
Chewy has built a solid customer base in a fast-growing industry that could help it sustain its impressive growth for a long time to come. The company had 19.8 million active customers at the end of Q1, a jump of nearly 32% from the year-ago period. More customer growth should be in the cards for Chewy too, as the share of e-commerce in the U.S. pet products market is expected to increase from 27% in 2020 to 34% in 2024, according to Packaged Facts.
Packaged Facts data suggests that the online pet food and supplies industry in the U.S. was worth almost $16 billion last year. By 2024, that number could exceed $24 billion. Chewy is just scratching the surface of a huge opportunity, as its trailing-twelve-month revenue of $7.66 billion indicates. More importantly, the company's existing customer base could turn out to be a huge gold mine. That's because Chewy estimates that its "customers historically spend over $400 with us in their second year, compared to approximately $700 in their fifth year and almost $900 in their ninth year."
In Q1, Chewy's net sales per active customer stood at $388, an increase of 8.7% year over year. So as the company's customer base matures and spends more money on its offerings, its top and bottom lines should keep getting better. That's why a market crash could be a great opportunity to buy this high-growth company -- which currently has a price-to-sales (P/S) ratio of 4.6, higher than the S&P 500's multiple of 3.15.
With a P/S ratio of over 31, there's no doubt that Twilio is a very expensive stock. It is one of those companies that have received a major shot in the arm thanks to COVID-19. Twilio was already benefiting from the shift from physical contact centers to cloud-based contact centers, but the novel coronavirus outbreak accelerated that transition.
Twilio estimates that only 17% of contact center seats were in the cloud prior to the pandemic. But by 2025, half of all contact center seats are expected to make the jump to the cloud. Not surprisingly, the cloud communications specialist has continued to grow at an eye-popping pace. Its Q1 revenue shot up 62% year over year to $590 million. Twilio's active customer base swelled to 235,000 accounts at the end of Q1, a 23.6% increase over the year-ago period.
More importantly, Twilio customers continue to open their wallets and spend more on its offerings. This is evident from the 133% increase in the company's dollar-based net expansion rate in Q1. The metric increases when the company's active customers buy more of its products or increase their usage of existing products.
Additionally, Twilio has been aggressively expanding its presence in the cloud communications space with smart acquisitions. It spent $3.2 billion to acquire customer data platform provider Segment in October last year, which expanded Twilio's addressable market to $79 billion. Segment has already started contributing to Twilio's growth, and it should present an additional avenue to drive customer spending, as well as help it bring new customers into its fold.
Twilio recently added another fast-growing niche to its cloud communications platform in the form of Zipwhip, a provider of toll-free messaging services, for $850 million. Zipwhip has recorded 400% growth in the past three years, and has over 30,000 customers. Twilio can engage its customer base better with this acquisition, and cross-sell its services to Zipwhip's customers.
Given all the tailwinds, it is not surprising to see why analysts expect Twilio's top line to increase 44% in 2021 and over 30% in 2022. What's more, the company's earnings are expected to increase at an annual rate of over 20% for the next five years. All of this tells us why it would be a great idea to take advantage of any potential dip in Twilio stock and plan to hold it for the long haul.
Apple stock isn't relatively expensive -- it has a trailing price-to-earnings (P/E) ratio of 33, which is lower than the S&P 500's multiple of 36. However, investors shouldn't miss the opportunity to buy this tech giant at a cheaper valuation if the opportunity to do so arises.
That's because Apple could turn out to be a classic example of a stock offering outstanding growth at a reasonable price. The iPhone maker's stock was recently upgraded by UBS analysts, who expect sales of its products to exceed expectations in the fiscal third quarter. Apple is expected to deliver 22% year-over-year sales growth for the June quarter to $72.9 billion. The investment bank also estimates Apple's earnings will come in at $1.01 per share, a jump of nearly 58% over the year-ago quarter.
The interesting thing to note here is that Apple's Q3 2021 growth would represent a step up over what it delivered in the prior-year period. Apple's revenue increased 11% in Q3 of fiscal 2020, while diluted earnings per share increased 18% year over year. The June quarter is usually slow for Apple as it winds down the production of its existing iPhone models and prepares for the launch of the next-generation lineup.
But this time it's different, as Apple is taking advantage of the transition toward 5G smartphones. The 5G-enabled iPhone 12 models have been in great demand since going on sale late last year, with Apple finding it difficult to produce enough units to meet demand. At the same time, customers are willing to spend more on the 5G-enabled iPhone models, as the year-over-year comparisons indicate.
Apple sold 57 million iPhones in the second quarter, as per Strategy Analytics' estimates, which results in an average selling price (ASP) of $841 given the company generated $47.9 billion in iPhone revenue during Q2. Apple only sold an estimated 39 million iPhones in the prior-year period, according to Strategy Analytics. The company reported $28.9 billion in iPhone revenue during Q2 2020, giving it an ASP of $742 during that same period last year.
Counterpoint Research points out that the installed base of the 5G-enabled iPhone 12 stood at 16% in the first calendar quarter of 2021, which coincides with Apple's fiscal Q2. Now, Apple CEO Tim Cook had pointed out in January 2021 that the overall iPhone installed base stood at over 1 billion units. This means that less than 80% of its installed base is on a 5G device, as the iPhone 12 series is the company's first 5G-enabled offering. So, Apple is sitting on a terrific opportunity to increase sales volumes and enjoy improved ASPs in the future.
The bottom line is that Apple stock seems primed for more upside after almost doubling since the beginning of 2020, and investors should consider taking advantage of any near-term pullback to buy the stock and set themselves up for long-term gains.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Twilio. The Motley Fool recommends Chewy, Inc. and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.