There are several mistakes investors can make during a downturn. One is trying to time the market. While it’d be nice to know in advance precisely when stocks will bottom out, reliably predicting that is next to impossible. It’s best to focus on the knowledge that bull markets always follow bear markets, and, on average, the former tend to be longer.
Investors will have plenty of time to recoup their losses in the coming years, but that also hinges on buying and holding on to the right stocks, whether or not they have hit rock bottom. With that said, PayPal (PYPL 4.72%) and Netflix (NFLX 0.02%) are two stocks that could help investors earn outsize returns whenever the next bull market finally comes.
1. PayPal is a fintech giant with plenty of room to grow
Digital payment methods are on the rise due to increased internet penetration worldwide and a shift toward e-commerce, which presents retailers with greater efficiency, cost savings, and a broader potential client base. That’s excellent news for PayPal, a leader in digital wallets. The company has experienced a slowdown recently, but that’s hardly surprising.
The pandemic and related lockdowns shifted an abnormal amount of retail activity online, benefiting companies like PayPal.
But these dynamics were never going to last forever and were bound to create challenging year-over-year comparisons for PayPal once they subsided. That’s what’s happening now. Inflation isn’t helping either. If people spend less money because prices are higher, that can impact PayPal’s revenue, earnings, and stock market performance.
The good news is that once better economic conditions arrive and customer spending increases, PayPal will profit. The company arguably benefits from a solid moat. First, there is its brand name; it is recognized as one of the leading digital payment platforms in the world. Second, PayPal’s ecosystem benefits from the network effect as its value increases as more people are plugged in.
More merchants attract more customers to it, and vice versa. How strong is this network effect? The company reports that as of the third quarter, 80% of the 1,500 largest online retailers in the U.S. and Europe accept PayPal. That metric has grown from 76% as of the end of 2021, and it is far above that of any of its competitors in this realm.
Investors can expect PayPal to continue adding online retailers to its ecosystem, considering how widespread it already is. It ended the third quarter with 432 million active accounts, growing 4% year over year. It also processed an impressive $337 billion in total payment volume (TPV), up 9% compared to the year-ago period. The company’s revenue increased by 11% year over year to $6.85 billion.
A bull market that coincides with improving economic conditions could bring more accounts and online retailers to PayPal’s ecosystem, thereby boosting its TPV and revenue. More importantly, the dynamics contributing to the rise of digital forms of payment will benefit PayPal’s business for years to come. It’s worth it to stick with this fintech giant.
2. Netflix still dominates the streaming industry
The cord-cutting trend is in full swing, and streaming giant Netflix has been one of the biggest winners. But the company now has far more competition than it did when it first pioneered its now ubiquitous business model. Streaming services are popping up like weeds, which is not making things easy for Netflix.
It has had to deal with slowing or non-existent user growth and dropping revenue growth rates. These factors help explain Netflix’s poor stock market performance over the past 12 months.
However, Netflix’s business is changing. After years of dismissing the idea of including ads on the platform, management finally gave in. It recently introduced a low-priced ad-supported tier, presumably to attract price-sensitive viewers. The advertising industry isn’t doing great right now due to the economic conditions. But once things pick up again, Netflix’s platform could become an extremely attractive advertising target.
It ended the third quarter with about 223 million global paid memberships and racks up billions of hours in viewing time every quarter. This new ad-supported tier only launched in 12 countries, but it accounts for 75% of the global brand advertising market across television and streaming. Netflix’s new plan won’t make an impact immediately, but over the long run, it could meaningfully contribute to the company’s top line.
Netflix is also cracking down on password sharing by making account holders pay for sub-accounts for people who aren’t in the same household. Password sharing has likely cost Netflix millions of dollars in lost revenue over the years, considering the more than 100 million people who use the platform for free. While these tweaks will help Netflix’s business, the company’s basic strategy remains the same: steal viewers from cable with its rich library of content people can view (or binge) whenever they want.
Netflix accounted for only 7.6% of television viewing time in November; it was well ahead of most other streaming giants, including Amazon Prime Video, Hulu, HBO Max, and Disney+. And that’s in the U.S. Netflix probably hasn’t made similar headway in many countries where streaming remains underpenetrated. In other words, the worldwide opportunities remain vast.
Netflix’s stock can bounce back as the economy improves and it continues to garner billions of hours of viewing time from its subscribers, thereby boosting its revenue and stock price. It’s too early to discount this longtime market beater.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Prosper Junior Bakiny has positions in Amazon.com and PayPal. The Motley Fool has positions in and recommends Amazon.com, Netflix, PayPal, and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.