3 growth stocks to buy before the next bull market
The market has always acted in cycles; a gradual upward march, followed by an occasional steep decline. It is likely that our current misery in the market will end in another rally, like many times before.
Growth stocks tend to do well in bull markets and can take a hit from Wall Street in bear markets. But quality companies will recover and reach new heights. Here are three growth stocks that are poised to hit new highs when the new bull market finally begins.
1. A tech giant for sale
Amazon (AMZN -1.77%) is best known for its e-commerce business, which accounted for 41% of U.S. market online sales in 2021. Amazon has grown into a conglomerate with thriving segments like Amazon Web Services (AWS), media streaming, and advertising.
You can see in the chart below how the stock’s price-to-sales (P/S) ratio fell to its lowest level since 2016, a multi-year low. The e-commerce business, which is price competitive and requires constant investment in fulfillment and supply chain, accounted for 84% of total revenue at the time. This figure has dropped to 73% in 2021, as these new segments contribute more to the business.
It might be fair to reward Amazon with a higher valuation if this trend continues. AWS was responsible for all of Amazon’s operating profits in the first quarter of 2022, despite only accounting for 15% of revenue.
Amazon is currently facing higher costs in its e-commerce business, and market sentiment is in the gutter. But Wall Street may come to appreciate Amazon’s emerging ad business and AWS’ continued strength as catalysts to lift the stock in the next bull market.
2. The second leader in e-commerce
Shopify (STORE -7.55%) has played a vital role in the long-term growth of e-commerce. Its software as a service (SaaS) allows any person or business to quickly create and manage an online store. Amazon may be the Goliath of e-commerce, but Shopify’s David’s Army of around 1.75 million merchants accounts for around 10% market share of online sales in the United States.
Businesses evolve over their lifetime, and Shopify is no exception. Management is currently focused on strengthening the fulfillment part of its ecosystem to provide two-day shipping to 90% of the US population and a simple system for product returns. Shopify has bought logistics company Deliverr for $2.1 billion and is investing heavily in expanding its nationwide network.
Shopify needs to successfully build its distribution network, and the current uncertainty has put off investors in a volatile market. You can see below that the stock’s P/S ratio has fallen to its lowest level since the company went public.
It’s a risk any time a company has to do something new, but the stock’s nearly 80% drop from the highs is a significant discount that arguably offsets the added uncertainty. Mr. Market tends to be an extremist, often overreacting to ups and downs. The next bull market could bring great returns if Shopify is successful in its execution plans.
3. This beverage company can boost your wallet
Celsius Fund (CELH -5.94%) is an energy drink company whose products target the active consumer with natural ingredients, and it claims its formula helps boost metabolism when used with exercise. Anything related to drinks is fiercely competitive, but finding a niche to tap into can be one way to overcome that. As of this writing, the top-selling energy drink on Amazon is a Celsius product, so sales momentum looks healthy.
Distribution is the key to growing sales of any physical product. Celsius has built its market footprint to over 140,000 outlets in supermarkets, convenience stores, gyms, pharmacies, and even the military. The company’s revenues have prospered accordingly, growing an average of 74% over the past five years.
You can see below how the stock’s P/S ratio had fallen from its peak when the market peaked in late 2021, but it remains well above pre-pandemic levels. The company burned cash in the past year with negative free cash flow of $77 million, resulting from investments to grow the company and higher input costs due to inflation.
Celsius has about $25 million in cash on its balance sheet, so management may be looking to raise cash soon. However, there is currently no debt on the books, so the company is on a stable financial footing. Assuming inflation recedes at some point, investors could see Celsius’ bottom line improve and the stock rebound in the next bull market.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Justin Pope has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Amazon, Celsius Holdings, Inc. and Shopify. The Motley Fool recommends the following options: $1140 January 2023 Long Calls on Shopify and $1160 January 2023 Short Calls on Shopify. The Motley Fool has a disclosure policy.