The tech-heavy Nasdaq Composite has fallen 22% from its high, putting the popular index in bear market territory. Many individual stocks have fallen much further. A variety of macroeconomic issues have contributed to that sell-off, including rampant inflation and Russia’s war on Ukraine. While those headwinds are ongoing, some Wall Street analysts see a rebound in the near future for some beaten-down tech stocks.
For instance, Keith Weiss of Morgan Stanley has a price target of $1,075 on Shopify (SHOP -3.71%), implying 150% upside from its current share price. Similarly, Michael Turrin of Wells Fargo has a price target of $285 on Twilio (TWLO -5.97%), implying 136% upside. Given the bullish conviction behind those numbers, let’s take a closer look at both stocks.
Here’s what you should know.
Shopify is a retail operating system for over 2 million businesses. Its software simplifies commerce by connecting operations across brick-and-mortar shops and digital channels, helping merchants manage sales and inventory from a single location. Shopify also provides solutions for payment processing, shipping, and financing, along with thousands of additional tools through the Shopify App Store.
That value proposition has made Shopify the most popular e-commerce software platform, helping the company gain an edge over several larger retailers. In fact, Shopify powered 10.3% of e-commerce sales in the U.S. last year, which puts it in second place behind only Amazon. Better yet, Shopify’s 2021 market share actually increased from 8.6% the year prior.
Not surprisingly, that market share has translated into strong financial results. In 2021, revenue rose 57% to $4.6 billion and operating profit skyrocketed 198% to $267 million.
Looking ahead, Shopify is investing aggressively in growing its business. That includes the building out of the Shopify Fulfillment Network (SFN), a system of warehouses across the U.S. that will simplify logistics for merchants and improve buyer experience. Once the SFN is complete, Shopify will be able to offer two-day delivery (or faster) to over 90% of the U.S. That should strengthen Shopify’s competitive position, helping it to capture more of its $160 billion market opportunity.
For what it’s worth, Shopify is one of my larger holdings, but near-term price appreciation of 150% may be too optimistic in the current macroeconomic environment. It’s certainly possible, but Shopify is best viewed as a long-term investment. With shares trading at a five-year low of 11.7 times sales, this stock looks like a bargain right now.
Twilio specializes in customer engagement. Its cloud communications platform involves a suite of tools for messaging, voice, email, and video, which help developers build interactive applications. Common use cases include contact centers, delivery notifications, and other account alerts like appointment reminders and password resets. Twilio also provides data management tools that help clients personalize communications, and pre-built applications for targeted marketing and account security.
Last year, market intelligence firm International Data Corporation once again recognized Twilio as the leader in the communications-platform-as-a-service (CPaaS) industry, citing the company’s broad range of capabilities and better growth strategy when compared to competitors.
Not surprisingly, the company is growing quickly. Twilio reached 256,000 active accounts in 2021, up 16% from the year before. What’s more, those customers spent 31% more in 2021 than they had the year prior. In turn, revenue soared 61% to $2.8 billion.
The only point of concern is profitability. Twilio generated negative free cash flow of $148 million in 2021. Investors should pay attention to that metric, though I think the situation will resolve itself as its business continues to scale.
On that note, Twilio is well-positioned for growth. Companies that provide a personalized and engaging customer experience benefit from increased loyalty and trust, which often translates into increased revenue. But building the necessary communications tools in-house is complicated and costly. That should be a tailwind for Twilio, helping it capitalize on its $79 billion market opportunity. From that perspective, Twilio certainly looks like a smart long-term investment, though a near-term price target of $285 may be too optimistic given the ongoing market volatility.