Peter Lynch, one of the greatest investors of all time, said: ‘I can’t say enough about the fact that profits are the key to success in stock investing. Whatever happens to the market, profits will determine the price. results.”
I believe this. That’s why, as a long-term investor, I try to keep an eye on earnings growth and predict where it will be in about five years. The idea is that if profits rise, the stock price will eventually rise as well. The ups and downs along the way are just noise.
However, I was recently reminded of how patient investors sometimes have to be. To take Sprouts farmers market as an example. Earnings per share (EPS) have risen continuously since the IPO eleven years ago. But after a decade of going nowhere, Sprouts shares have skyrocketed 200% in the past year, finally reflecting long-term earnings per share growth.
Investors should remain patient, as it can sometimes take some time for earnings to lift a stock price. But sooner or later they will be rewarded. Therefore, patience is needed for investors Airbnb (NASDAQ:ABNB), PayPal shares (NASDAQ:PYPL)And PubMatic (NASDAQ: PUBM). But here’s why I think profits are going up for this trio of phenomenal stocks.
1. Airbnb
With more than 125 million nights and experiences booked in the second quarter of 2024 alone, Airbnb is a well-known and widely used travel booking platform. Landlords offer their spaces for rent and post tailor-made travel experiences.
Travelers turn to the platform to book, and Airbnb sits in the middle, quietly taking the high margin of the deal.
Airbnb’s business model is indeed extremely lucrative. With a 20% profit margin in the second quarter, few companies can exceed their profitability. And from a free cash flow perspective, things are even better with a margin of 41%.
If there’s a knock against Airbnb, it’s that the platform is already big and growth is slowing as a result: second-quarter revenue rose just 11% year-on-year. Therefore, management focuses its attention elsewhere.
The truth is that Airbnb’s core platform is rock solid: millions of people use it without the need for advertising. This allows management to enter a ‘new phase’. The goal is to launch several new companies every year. Many will fail. But it hopes a small percentage will succeed and contribute to the company’s growth.
Airbnb’s revenues are strong and should remain strong. And if this phenomenal stock can find new sources of growth, profits could soar in the coming years, driving the stock price higher.
2. PayPal
Over the past twelve months, fintech pioneer PayPal has earned just over $4 per share. Four years ago, profits were about the same, meaning growth has been lacking. And investors can point the finger at the lack of earnings growth to explain the lackluster share price.
However, PayPal is already on a better path for earnings growth. The company reworked its management about a year ago, and this new team is forging important new partnerships, improving margins and looking to develop new ways to grow the business.
As for the details, PayPal has long known that it has valuable consumer data. And it looks like management is finally figuring out ways to package this to improve merchant service. More details would be nice. But an important detail is that earlier this year the company hired Mark Grether to head up its advertising operations – the same Grether who quickly built a $1 billion advertising business for Uber.
With margins improving under new management and new potential revenue streams coming online, PayPal’s revenues should finally grow again, which in turn should send its shares soaring in the coming years.
3. PubMatic
While Airbnb and PayPal are household names, PubMatic is much smaller and obscure. But I still feel comfortable calling it phenomenal. As I will explain, this small company dares to be different.
PubMatic’s market cap is just $750 million at the time of writing. But this small company is determined to maintain a clean balance sheet starting in the second quarter of 2024, with no debt and $166 million in cash, cash equivalents and short-term investments. That is unusual for a company of this size.
Additionally, PubMatic chooses to own and operate the entire hardware infrastructure as well, rather than relying on public cloud providers, where it has no control over pricing. That’s not necessarily an easy path, but it does give the company a greater degree of control over its operations.
PubMatic is an ad technology company that works with publishers to monetize content. It hasn’t been a good environment for these types of companies lately. But PubMatic is still growing modestly and has a profitable business. And the company is in great shape for earnings growth when the market eventually warms up again.
In the coming years, it will be important for investors not to focus so much on the stock prices of Airbnb, PayPal and PubMatic. As I mentioned with Sprouts stock, the price can remain stagnant for a very long time. But if earnings are rising and the company has the opportunity for more growth in the future, these will be stocks to continue to hold, while expecting prices to eventually catch up.
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Jon Quast holds positions at Airbnb and PubMatic. The Motley Fool holds positions in and recommends Airbnb, PayPal, PubMatic and Uber Technologies. The Motley Fool recommends Sprouts Farmers Market and recommends the following options: Short December 2024 $70 calls on PayPal. The Motley Fool has a disclosure policy.
Prediction: These Three Phenomenal Stocks Are About to Soar Originally published by The Motley Fool
