After several months of steadily climbing upwards, the stock market has taken a downturn lately. This recent pullback might provide buying opportunities for stocks that are in a good position to succeed both during and after the coronavirus pandemic. The two companies that I'm keeping an eye on are Amazon (NASDAQ:AMZN) and Chegg (NYSE:CHGG).
Both stocks have seen their shares climb significantly higher year to date, leaving few opportunities to buy on the dip in the share price. Let's take a closer look into why Amazon and Chegg are worth scooping up in the event of a full-blown selloff.
The stock market is experiencing a sell-off. Image source: Getty images.
Amazon is performing well during the pandemic
Sales at Amazon have been surging since the start of the pandemic, rising 26% in the first quarter and 40% in the second. While some of this growth has come from customers buying more than usual, new users are also signing up, and some of them are likely to stick around long after the pandemic has run its course.
As of its latest update in January, Amazon had 150 million Prime members. These customers not only pay a fee to become a member but also shop more than non-Prime members do. Undoubtedly, people are relying on Amazon more than ever during the pandemic. That reliance and the investments the company is making to add benefits to members likely led to a significant number of new Prime subscriptions throughout the year.
In addition to increasing sales of products, Amazon is experiencing growth in its Amazon Web Services (AWS) segment. Importantly, AWS made up 12% of revenue in its most recent quarter while making up 58% of operating profits. As a result of COVID-19, businesses have accelerated their shift to digitization, and AWS is benefiting from that trend. While AWS will face competition from Alphabet's and Microsoft's cloud-platform offerings, businesses that shift to digital aren't likely to reverse that change.
Some investors might be put off by Amazon's rapid stock growth. This year, Amazon started out trading at a price-to-earnings (P/E) ratio of 80. After its run-up, it now trades at a P/E ratio around 120. If the market sell-off continues, you might be able to acquire shares of this stock at lower levels.
Sales are surging for Amazon. Image source: Getty images.
Chegg is deepening its connection with students
As the leading online student learning platform, Chegg, too, is seeing financial benefits as a result of COVID-19. When courses are offered online, it increases the value proposition for Chegg's services. A student can use its offerings to help complete coursework and supplement learning materials.
In its most recent quarter, revenue increased 63% from the same period a year ago. That boost is likely to continue, as many high schools and colleges decided they will go with remote learning in the fall semester. Indeed, the company said it expected revenue in the range of $605 million to $610 million for the full year, which at the midpoint would be an increase of 48% from 2019.
Investors were pleased to see the substantial increase in operating income as a result of the increase in revenue. While revenue increased 63%, operating income tripled, revealing the potential profits the company can achieve as it scales up.
Moreover, the company's acquisition of Mathway for $101 million in June increases its capabilities in the high-school level math space. This is vital because it allows Chegg to reach potential college students while they're still in high school. And students who sign up with Chegg in high school and gain experience on the platform are more likely to maintain that membership throughout their college years.
Investors have recognized Chegg's excellent prospects and bid the share price up more than 70% this year. Because the company only recently turned profitable, it will not be helpful to measure it based on earnings. However, you can look at its price-to-sales (P/S) ratio. Chegg started the year selling at a P/S ratio of 10, and before the market sell-off, it was trading at a P/S of just over 16. If the market rout continues, you might get an opportunity to buy the stock of this fast-growing consumer goods company at a more reasonable price.
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September 12, 2020 at 06:00PM
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