Since March 2009, the U.S. equity market has enjoyed one of the longest bull runs in history. Not even a pandemic could stop the party -- the coronavirus-driven bear market of March 2020 lasted just 33 days. However, this emotion-based rally cannot last indefinitely. Sooner or later, market valuations will have to catch up with fundamentals.
Currently, the S&P 500's price-to-sales (P/S) multiple is 3.2, the highest it has ever reached. At the same time, the investor margin debt level has also reached its highest-ever level of $861 billion, according to the Financial Industry Regulatory Authority. This highlights excessive risk-taking behavior by investors. A significant jump in margin debt was also seen prior to the dot-com bubble of 2000 and the market crash of 2008, implying that we may now be just on the cusp of an impending market crash.
However, retail investors can turn these difficult times into a long-term opportunity by picking up the following fundamentally strong stocks, which most likely will be available at bargain prices during a crash.
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1. Fiverr
A tight labor market due to an underpaid workforce, high unemployment benefits, and other factors are proving to be a boon for freelancing marketplace Fiverr International (FVRR 1.48%). The company is well-positioned to benefit from a pandemic-driven shift in workforce behavior, where people are prioritizing flexibility and the potential to earn more in freelancing jobs over traditional, fixed-pay jobs. With the total number of freelancers in the U.S. expected to soar from 59 million in 2020 to 87 million in 2027, it seems many people won't be reverting to the pre-pandemic way of doing things.
In the first quarter, Fiverr's revenue doubled year over year to $68.3 million. This phenomenal growth was driven by a 56% year-over-year jump in active buyers to 3.8 million, a 22% increase in spend per buyer to $216, and a 10 basis-point expansion of the take rate (revenue divided by the total value of transactions ordered through its platform in a given time frame) to 27.2%. The company is focusing on more frequent and expensive projects through its recently launched Fiverr Business platform. The company is also guiding for a solid 59% to 63% growth in fiscal 2021 revenue.
Trading at over 32 times trailing-12-month (TTM) sales, Fiverr is an expensive investment, especially for an unprofitable company. The company faces risks such as stiff competition from other freelance marketplaces, including Upwork and Freelancer; changing regulations around how contractors are classified; and the possibility of employers bypassing Fiverr to directly contract with freelancers. However, considering the company's brand awareness and its highly efficient marketing, Fiverr should be able to capture a growing portion of the $115 billion addressable freelance marketplace opportunity.
2. Apple
After underperforming broad market indices in the first few months of 2021, Apple (AAPL 2.12%) stock is now gaining momentum ahead of the company's fiscal third-quarter earnings (ended June 30) report, which will be released on July 27. Currently trading at 7.8 times TTM sales, this $2.47 trillion market capitalization titan will most likely be available at a cheaper price during a market crash.
With a TTM net operating cash flow close to $100 billion, hugely popular iPhone and iPad franchises, an installed base of over 1.65 billion devices helping push penetration of its services, and significant pricing power due to an exceptionally sticky customer base, Apple is one unavoidable pick for retail investors, especially during a market crash. The company's customer loyalty is hard-earned -- Apple has established a winning formula of consistent upgrades to its products and services to ensure existing customers don't switch to competitors.
Apple will also benefit from the 5G device upgrade cycle for several more years to come. The company's first 5G smartphone series, the iPhone 12, accounted for almost one-third of smartphone industry revenue in the first quarter of this year. With the company gearing up for the launch of the next 5G smartphone series in the second half of fiscal 2021, the iPhone 13, this will continue to be a major growth driver. Increasing iPhone adoption has also helped boost sales of high-margin and recurring services, such as Apple Music, the App Store, and Apple News+, as well as iPhone accessories and wearables.
Apple's recent fiscal second-quarter results (for the period ended March 31) were quite phenomenal with revenue jumping 54% year over year to 89.6 billion, far ahead of the consensus estimate of $77.4 billion. The company's earnings per share of $1.40 also beat the consensus estimate of $0.99. Analysts expect a 22% year-over-year jump in the company's third-quarter revenue.
With an estimated value of $263.4 billion, Apple has the most valuable brand worldwide in 2021. Against the backdrop of several tailwinds and a solid financial position, the company offers an attractive risk-reward proposition to investors.
3. Texas Instruments
Shares of semiconductor company Texas Instruments (TXN 2.95%) have gained over 40% in the past year. The integrated device manufacturer is focused on analog chip and embedded processors, and its lack of dependence on already overburdened third-party foundries has played out exceptionally well. With Texas Instruments operating its own foundries, the company stands to benefit significantly from the ongoing semiconductor supply and demand imbalance that is expected to continue until next year.
Texas Instruments does not manufacture cutting-edge CPUs and GPUs but instead focuses on producing simple chips used in around 80,000 products. These products are an integral part of electronic equipment used in multiple business areas, such as industrials, personal electronics, automotive, communication equipment, and enterprise systems. A diversified revenue base across products and sectors ensures significant business stability for Texas Instruments, even in times of heightened economic uncertainty.
The company has chosen to maximize its free cash flow (FCF) per share, which has grown by 12% annually from 2004 to 2020. The company aims to return all FCF to shareholders through dividends and share buybacks in the long run. Texas Instruments has grown its dividend for the last 17 consecutive years at a compound annual rate of 26%. In the same time frame, it has reduced its share count by 46%.
Trading at 11.4 times TTM sales, the stock is not cheap, especially since the median P/S multiple for the semiconductor industry is only three times. However, thanks to its resilient and diversified business model and the focus on returning capital to shareholders, the company can prove to be an attractive investment even at these elevated levels.
Manali Bhade has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Fiverr International, and Texas Instruments. The Motley Fool recommends Upwork and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
