The market has been indiscriminately punishing tech stocks over the last two months, which has created some attractive entry points for investors. Three stocks that can be picked up at rock-bottom valuations now are Shopify (NYSE: SHOP), CrowdStrike (NASDAQ: CRWD), and MercadoLibre (NASDAQ: MELI).
These companies have significant industry tailwinds in their favor, and the declines in their share prices haven't had much to do with the states of their underlying businesses. With all three stocks down more than 40% from their all-time highs, now seems like a great opportunity to load up on these sector leaders.
Creating an e-commerce site without any help would be difficult at best for a small business, and expensive for a larger one. Fortunately, Shopify provides the tools that companies need to rapidly and easily develop an online presence. Additionally, it can handle a host of business needs like payment processing, shipping and fulfillment solutions, and financial reports.
One area it has recently been focused on improving is its fulfillment network. To allow its clients to better compete with big-box chains, Shopify announced it was investing in two-day shipping and return centers, and therefore deploying capital to expensive projects like new fulfillment warehouses. This spooked investors, as Shopify's business has been a high-margin software model.
Shopify is committed to giving its customers the best solutions, so its plans to upgrade its fulfillment infrastructure are entirely on-brand. In fact, investors should have seen the move coming, as the company purchased Six River Systems -- a warehouse automation specialist -- back in 2019. It's likely this expansion will make Shopify's solutions more attractive to larger businesses, too.
Shopify is trading for around 26 times sales. The last time it traded at a valuation this low was during the early weeks of the pandemic.
During the third quarter, Shopify's revenue grew 46% year over year. When it reports Q4 earnings on Feb. 16, its revenue will likely grow again, further decreasing the price-to-sales multiple should the stock price stay the same. When that report arrives, I will be examining its revenue growth as well as its gross profit -- the metric that will inform me how expensive Shopify's revenue is becoming. However, with the stock down nearly 50% from its all-time high, I think Shopify is a fantastic buy.
With more companies allowing (or requiring) employees to work from home, their leadership teams are discovering that it's more crucial than ever before to secure the various access points to their computer networks. CrowdStrike's cybersecurity offerings utilize a cloud-based approach, providing endpoint security to employees no matter where they are working. Its Falcon software gives IT teams visibility into who is accessing networks and provides tools to prevent attacks from succeeding. In 2021, Gartner named CrowdStrike a leader in endpoint protection platforms and also recognized it for having the most complete vision for endpoint protection among its peer group.
In its fiscal 2022 third quarter, which ended Oct. 31, CrowdStrike reported outstanding numbers. Its annual recurring revenue grew 67% year over year and it added 1,607 net new subscribers, bringing its total to 14,687. That customer base includes 63 members of the Fortune 100 and 14 of the top 20 banks. These customers are also expanding their usage of its services: Its dollar net retention rate was 124.8%, so, on average, for every dollar, a customer spent with CrowdStrike last year, it spent $1.24 this year.
Customers are also increasing how many of its modules they are using.
|Share of Customers Using 4 or More Modules|
|Q3 Fiscal 2019||Q3 Fiscal 2020||Q3 Fiscal 2021||Q3 Fiscal 2022|
CrowdStrike is growing through both customer acquisition and expansion. The stock's price-to-sales ratio rose to above 60 in early 2021, but in the wake of the tech sector correction of the past few months, it's now back down to around 29 -- a low it has only briefly touched since the start of the pandemic. CrowdStrike is a solid bet, and investors can get it now at a more reasonable valuation.
Perhaps the most undervalued stock of this trio is MercadoLibre. The Latin American e-commerce leader is bringing e-commerce, digital payments, and logistics solutions to 18 countries. Across its ecosystem, the number of unique users hit 78.7 million during Q3, showcasing its widening reach.
During the earlier stages of the pandemic, the use of e-commerce and digital payments soared in nations all around the world. Now, with those unusual surges in the rear-view mirror, many companies in this space are facing tough year-over-year comparisons, and MercadoLibre is no exception.
However, its revenue still grew by 72.9% in Q3 on a currency-neutral basis to $1.9 billion -- impressive, but a slowdown from its 148.5% increase in the prior-year period. Overall, its Q3 results were strong across the board, with gross margin rising and operating expenses growing slower than revenue.
Right now, it's trading at eight times sales -- a rare occurrence for MercadoLibre. Over a 10-year stretch, it has only traded at valuations this low during three fairly brief periods.
MercadoLibre is expanding quickly and operating in an environment rich with growth opportunities. Investors who missed out on its meteoric stock rise over the last decade have a chance now to get in at a bargain valuation.
All three of these businesses have bright prospects for 2022 and beyond but are priced at levels that will appeal to bargain-hunting investors. While the market may not show these stocks much love in the short term, I believe each is a fantastic long-term investment.
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Keithen Drury owns CrowdStrike Holdings, Inc., MercadoLibre, and Shopify. The Motley Fool owns and recommends CrowdStrike Holdings, Inc., MercadoLibre, and Shopify. The Motley Fool recommends Gartner and recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. 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.