- The Nasdaq has gotten off to a strong start in 2023, outperforming the Dow and S&P 500
- Several high-growth tech stocks have staged impressive recoveries off their recent 52-week lows
- I recommend buying Etsy and Unity Software as easing inflation fuels hopes of smaller rate hikes in the near term
Stocks on Wall Street have gotten off to an upbeat start to the new year, powered by signs that inflation may have peaked. That, in turn, has boosted expectations of less aggressive interest rate hikes from the Federal Reserve in the months ahead.
Traders' bets of a 25-basis point rate hike by the Fed in February shot up to 94% after data on Thursday showed U.S. consumer prices fell for the first time since May 2020. The U.S. central bank raised rates by 50 bps in December after four back-to-back 75-bps hikes.
The Nasdaq has been the best performer of the three major U.S. indices in 2023, gaining 5.1% so far as investors rotate back into beaten-down growth stocks amid easing macro concerns.
Taking that into account, I recommend buying shares of Etsy (NASDAQ:ETSY) and Unity Software (NYSE:U) as the former high-flying high-growth tech stocks look to regain their mojo following last year’s brutal selloff.
Despite near-term challenges, both tech companies still offer further upside and have plenty of room to grow their respective businesses, given the solid demand outlook for their unique services and innovative tools.
Etsy
- Year-To-Date Performance: +9.9%
- Market Cap: $16.5 Billion
Etsy - the online e-commerce platform for handmade items, vintage goods, and craft supplies - has enjoyed a powerful rebound since seeing its stock drop to a 2022 low of around $67 in mid-June.
Shares of the Brooklyn, New York-based internet retailer have run about 90% higher in the past six months, far outpacing the comparable returns of major industry peers, such as Amazon (NASDAQ:AMZN) (-8.8%), Shopify (NYSE:SHOP) (+16.8%), and eBay (NASDAQ:EBAY) (+9.8%), over the same timeframe.
Despite the recent rally, ETSY stock remains 57% below the November 2021 all-time high of $307.75. At current levels, the tech company has a market cap of $16.5 billion, compared to a valuation of almost $38 billion at its peak.
I remain constructive on Etsy and believe the arts-and-crafts platform is still one of the best internet stocks to own in 2023, given the company’s improving fundamentals, stabilizing user growth trends, and high free cash flow margins.
Consumers that flocked to its platform during the COVID pandemic stayed to shop for handmade crafts and other unique goods offered on its online marketplace. Etsy’s number of active buyers on its platform has doubled since 2019 to reach 88.3 million, while habitual buyers - those with six purchases and over $200 in spending during the past 12 months - more than tripled.
Source: Etsy
The next major catalyst is expected to arrive next month when Etsy reports Q4 financial results after the U.S. market closes on Feb. 28.
Data from InvestingPro suggests that Wall Street analysts are relatively optimistic ahead of the report, with analysts raising their EPS estimates at least ten times in the past 90 days while only making one downward revision.
Source: InvestingPro
Consensus calls for earnings per share of $1.11, the same as in the year-ago period, while revenue is expected to climb roughly 5% year-over-year to $751.1 million. If confirmed, that would mark the highest quarterly sales total in the company’s history, thanks to an expected boost in transactions of handmade products and unique merchandise on its platform.
Underlining the resilience of its asset-light business model, the internet retail company has topped Wall Street’s profit and sales expectations for ten consecutive quarters, dating back to Q2 2020.
Unity Software
- Year-To-Date Performance: +9.7%
- Market Cap: $12.6 Billion
Shares of Unity Software lost 80% of their value in 2022 as the video game design, and animation software developer fell out of favor with investors amid a worsening macro backdrop.
However, with fears easing over higher interest rates, soaring inflation, and a looming recession, U stock has staged a strong rebound since falling to an all-time low of $21.22 in early November, rising almost 46%.
At current levels, the San Francisco, California-based tech firm - which is still 85% away from its record peak of $210 touched in November 2021 - has a market cap of $12.6 billion, compared to a peak valuation of over $55 billion.
Widely considered one of the leading video game software development companies, I believe Unity Software’s stock is poised to recover from 2022’s vicious selloff and outperform in the year ahead as it remains well-placed to reap the benefits of the ongoing growth in demand for interactive, real-time 3D content.
Unity provides a widely popular cross-platform game engine used to create, operate, and monetize interactive content for mobile phones, tablets, PCs, consoles, and virtual reality devices. In fact, it is said to power over 70% of all mobile games.
In a promising sign, the number of customers spending $100,000 or more on Unity’s platform rose to 1,075 in its most recent quarter, up 10.5% from 973 a year ago.
Unity is scheduled to deliver Q4 numbers on Thursday, Feb. 2, after the closing bell. Analysts have become more optimistic about the video game developer tools maker’s upcoming results, as per InvestingPro, revising EPS estimates upward 11 times in the past 90 days to reflect an increase of over 500% from their initial expectations.
The revisions follow a strong earnings result in November that sent shares surging upward.
Consensus calls for EPS of $0.01 per share, compared to a loss of $0.05 per share in the year-ago period. If that is, in fact, the reality, it would mark the first profitable quarter in Unity’s history since going public in September 2020.
Revenue is expected to climb 38.3% Y-o-Y to a record $436.9 million, thanks in large part to the strong demand it has seen for its video game and digital content creation platform.
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Disclosure: At the time of writing, I am short on the S&P 500 and Nasdaq 100 via the ProShares Short S&P 500 ETF (SH) and ProShares Short QQQ ETF (PSQ). The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.