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The Next Monster Stocks in the Making

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The pandemic ended the longest period of economic expansion in American history (uninspiring GDP prints notwithstanding). The Fed pumped in billions of dollars into the economy and the low yield environment ignited risk-on sentiment. The result? A prolonged bull market in US equities, dotted with temporary blips due to pandemic-related uncertainties.

Market Commentary

By Andrew Lane | November 1, 2021

The uptrend has continued into 2021. As of end September, the Buffet Indicator (ratio of total stock market valuation to GDP) stood at north of 180%, substantially higher than the historical average. Whichever way you look at it, US equities are currently overvalued. This has traders wondering about potential. Where is the opportunity to buy growth? A few candidates stand apart, leading or disrupting the industry to which they belong, and representing high scope for growth. Here’s a look at some of them.

Etsy: So Not Bitsy

In 2020, Etsy became a Wall Street sweetheart. The handmade, vintage and craft store grabbed the spike in demand for masks during the pandemic, shipping over 54 million face masks during the year. In doing so, it shrugged off its previous image of having a limited offering, a clunky payments system and weeks-long delivery timelines. These were replaced with customers having an app that fulfilled their sudden needs in a few swipes. People came to rely on Etsy to improve their living spaces amid the WFH scenario. Etsy’s price shot up 301% in 2020. However, more recently, the stock has lost 9% after reporting second-quarter results, despite beating estimates by a healthy margin.

Heading into the next earnings release in early November, analysts expect the stock to display strength. Market sentiment continues to be positive for Etsy, as can be seen in the Acuity Trading Dashboard.

Despite the rally year to date, the company’s potential is palpable. The platform’s revenues were up 23% year-on-year in the second quarter, and its user base has expanded to 90 million active buyers and 5.2 million sellers, up 50% and 67%, respectively. Many of these customers are sticky, exhibiting the ability to retain customers. Moreover, Etsy’s acquisition of fashion reseller Depop gives it broader access to apparel, which is by far the largest ecommerce segment. Etsy also acquired Brazilian retailer Elo7 and musical instrument marketplace Reverb, indicating a readiness to deploy its considerable free cash flows ($787 million in 2020) for growth by increasing its product offering.

Etsy has also extended its utility to sellers and advertising clients through services like Etsy Payments and Etsy Ads.

Despite the likes of Amazon in the ecommerce market, Etsy has carved a niche by providing customisability and non-mass production products. Also, it cemented its competitive advantage in this niche while expanding into other high growth sectors.

NXP Semiconductors: No Chip on Its Shoulder

The pandemic exposed many fragilities in the global supply chain, including the concentration of semiconductor manufacturing in Asia. Added to that was a faster-than-expected recovery in automobile sales, which kickstarted a queue at the fabricators, and has not yet let up despite price hikes. The shortage has affected tech supply worldwide, from automobiles to gaming consoles and gadgets.

NXP Semiconductors has ridden the wave of resurgent demand, growing sales 43% year-on-year in the second quarter. The company is a vendor to some of the economy’s most exciting segments, including automotive, IoT (internet of things), smartphones, and communications infrastructure. The company is now poised to benefit from the self-sufficiency-inspired political move to reward US-based semiconductor investment. The company has also rebranded itself to address climate-based initiatives. It sees itself as an important player in the green energy transition. This role includes chip production for electric vehicles, EV charging, and energy infrastructure.

Despite being well positioned, the stock has lost more than 4% over the past month. Among overvalued stocks, this is one that has underperformed the market and seems ripe for a rally. Sentiment for NXP Semiconductors is also overly positive, according to the Acuity Trading Dashboard.

DocuSign: Shows Signs of Growth

With pandemic restrictions, companies signed documents online rather than physically. DocuSign dominates the digital signature space, with a 70% market share. Its TAM (total addressable market) is estimated at a whopping $50 billion.

DocuSign already integrates with leading software providers like Oracle, Microsoft, and Google. While the company has been toeing the profitability line, its GAAP consistent earnings are in the red, which is consistent with a young tech firm rapidly expanding its services. Per-share losses contracted by 63% in the second quarter, while revenues grew 50% year-on-year. Its subscription model provides a recurring revenue stream and the company witnessed improved customer retention.

The stock has taken a hit recently, with investors shifting their attention to cyclical growth stocks, amid the reopening of the economy. However, DocuSign’s financial performance shows a company that has captured a strategic advantage and whose value addition in terms of cost-saving is something clients are aware of. Unlike home décor and exercise equipment, digital signing is not just a pandemic play. Instead, the pandemic highlighted the savings in both cost and time of the process. DocuSign Agreement Cloud extends the signing process to agreement terms and renewals, helping clients rapidly manage and renew agreements throughout their lifecycle.

The stock has remained broadly flat over the past month and seems ready for a good run ahead.

All three stocks have key competitive moats that allow them to take advantage of industry trends and can help propel them to become the next monster stocks.

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