The stock market can be very unpredictable year to year, but the most surefire predictor of long-term returns is whether you own shares of companies that are reporting growing revenue. If you hold a collection of magnificent companies that grow over many years, you’re effectively guaranteed to grow the value of your investments.
Now might be a great time to consider buying shares of Chinese tech giant Alibaba (BABA) and top retailer Ulta Beauty (ULTA). These stocks are down from their highs, but trade at discounted valuations. These could be timely picks for a long-term growth investor.
Alibaba: Down 72%
Alibaba is the largest e-commerce company in China. The stock got knocked down over the last few years thanks to a sluggish economy, but the shares are now selling at a cheap valuation that hardly prices in any future growth, which seems very unrealistic for the tech giant.
Online retail sales in China were estimated at $1.8 trillion in 2019 and expected to reach $3.5 trillion by 2024, according to the International Trade Administration. Most of Alibaba’s revenue from retail comes from marketing services and other fees charged to merchants, but the transaction values from Taobao and Tmall make up half of China’s e-commerce market, with JD.com sitting well behind at 15.9%. After seeing revenue for the commerce group dip 3% in the fiscal year ending in March, Taobao and Tmall reported double-digit growth in the last quarter, indicating a strengthening economy in China.
As China’s economy recovers, Alibaba should see more growth over the next several years. One catalyst is the international digital commerce group, including results from Aliexpress, where revenue surged 41% year over year last quarter. Aliexpress is clearly gaining traction with overseas customers, and could grow into a much larger business.
Like its U.S. counterpart Amazon, Alibaba has a sprawling business, with revenue streams from cloud services, entertainment, and logistics. Alibaba doesn’t operate like a traditional retailer, but basically facilitates transactions between buyers and sellers. It’s like a giant data-gathering network, which is a competitive advantage. It uses all the data gathered from communications and transactions across its various business units to serve customers better, and therefore deliver long-term returns to shareholders.
The stock is trading at a low forward price-to-earnings (P/E) ratio of 10. Considering that the cloud business reported a 106% year-over-year increase in adjusted operating profit last quarter, Alibaba could be on the verge of a long stretch of profitable growth over the next decade. Investors are getting a steal on one of the world’s leading technology firms.
Ulta Beauty: Down 18%
Ulta Beauty has been riding a wave of growing demand for beauty products since the end of the pandemic. It operates the largest footprint of beauty stores across the U.S., with 1,359 locations. Consistent double-digit growth in sales and earnings per share sent the stock up 80% over the last five years, but the stock still trades at a reasonable valuation that should lead to further outperformance for investors.
Ulta is benefiting from a market-leading selection of beauty products. It offers everything from mass market to high-end products. This means it can adapt to whatever is hot in the marketplace, such as the recent explosive growth for e.l.f. Beauty products.
Ulta reported a healthy 9% year-over-year increase in comparable store sales last quarter. That’s down from the exceptionally strong 18% increase in the year-ago quarter. The deceleration is partly why the stock has fallen recently. Wall Street is worried about the impact of shrinking inventory at retailers and whether that might lead to further slowing sales growth in the near term.
Still, Ulta is well positioned for more growth over the long term. As the leading beauty retailer, it has an advantage thanks to its ability to sell products through multiple channels. It has a partnership with Target, in addition to its physical stores and e-commerce business. Meeting customers at various points is helping grow memberships for the Ulta Rewards program. These repeat revenue streams from loyalty members, in addition to full-service salons offered at its stores, are worth paying up for. .
Overall, the beauty and personal care products market is projected to grow at 7.7% per year through 2030, according to Grand View Research. Ulta should be able to grow somewhat faster than that given its already large market presence and word-of-mouth marketing.
The stock trades at a forward P/E of 17, which is attractive for a growing business. This seems to be a great entry point for a new investor to start a position, or a current shareholder to consider buying more shares to fill out a position in this magnificent growth stock.
— John Ballard
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Source: The Motley Fool