During the good times, stocks in general tend to perform well, even if it's not necessarily warranted given their financials. However some stocks are positioned to really benefit from the good tidings a bull market brings. Three that rise to the top are dominant software design provider Adobe (NASDAQ: ADBE), cloud-based e-commerce mainstay Shopify (NYSE: SHOP), and graphics chip king NVIDIA (NASDAQ: NVDA).
Up, up, and away
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Tim Brugger (Adobe): Considering its stock is up 47% year to date, it's not surprising that Adobe is trading at 47 times trailing earnings. But Adobe has earned its outstanding performance and what may appear to be a relatively expensive stock price. However, at just 29.5 times forward earnings, Adobe's valuation suddenly doesn't seem so steep.
Last quarter's record-breaking $1.84 billion in sales, good for a 26% increase, wasn't the only good news Adobe shared. Adobe's earnings per share (EPS) soared 56% to $0.84, obliterating last year's $0.54 a share.
Adobe's emphasis on generating recurring revenue via monthly subscription sales of its design software -- the only alternative available to customers -- wasn't received well when first introduced several years ago. But you can bet Adobe shareholders aren't complaining about its growing foundation of ongoing revenue.
The third quarter is similar to what investors can expect long into the future. Though product sales edged down, Adobe's $1.57 billion in subscription revenue was a stellar 34% gain. Toss in the $111.8 million Adobe generated from its services and support unit, and $1.68 billion -- a mind-boggling 91% of sales -- are recurring.
The good tidings that a bull market brings about are ideal for Adobe. But even if the economy turns sour for a while, Adobe's strong financial performance would continue given the relative stability of its revenue. An unstoppable bull market just makes it that much easier for the Adobes of the world.
Consumer confidence will lift this sales platform
Keith Noonan (Shopify): As a growth-dependent stock that's gained roughly 180% over the last two years and trades at a whopping 16 times forward sales estimates, Shopify is naturally suited to perform better under bull-market conditions. Even more so than most other companies, its business model is also one that benefits from a strong economy.
Shopify provides online sales platforms as a service, allowing its customers to outsource the creation and maintenance of their digital sales portals. It currently serves more than 500,000 vendors in roughly 175 countries, and it generates subscription revenues from businesses that use its platform and by claiming a small portion of each sale that is made.
Under strong economic conditions, people are more likely to purchase items through the vendors that use Shopify's sales platform. The wealth created by a runaway bull market is also likely to mean that more new businesses are opened, thereby broadening Shopify's potential subscriber base. The large majority of the company's customers are small and medium-sized enterprises, and the health of the overall economy often plays a deciding role in whether these types of businesses get off the ground.
That's not to say Shopify's performance is entirely dependent on a bull market, but it's a stock that's best positioned to be a market-beater when the economy is already roaring. The company is still just scratching the surface of its addressable market and has tremendous long-term growth potential, and a raging bull market should help it realize that potential on an accelerated timeline.
Chris Neiger (NVIDIA): The graphics chipmaker has delighted tech investors as they've hitched a ride on the company's bull market run -- which has pushed NVIDIA's share price up more 550% over the past two years. Those staggering gains have been fueled by both the company's strong quarterly results and NVIDIA's ability to apply its chip prowess to new markets.
NVIDIA reported revenue of $2.23 billion in its fiscal 2018 second quarter, up 56% year over year, and saw its GAAP earnings per share hit $0.92 -- a massive 124% increase from the year-ago quarter. The company also managed to increase sales in its gaming segment -- which accounts for more than half of NVIDIA's top line -- by more than 50%.
Aside from its core gaming segment, the company is using its leading graphics processing units (GPUs) to power its advanced driver assistance computer, called Drive PX, which is already being used and tested by 225 automakers and Tier 1 automotive suppliers.
NVIDIA's growing list of partnerships in the driverless car space mean that it's poised to tap into the $77 billion driverless market (by 2035).
If that weren't enough to boost investor sentiment, NVIDIA has estimated that its chips are creating a total addressable market of $39 billion in artificial intelligence between 2020 and 2025.
The good news is that even when the bull market turns south, NVIDIA's strong financials, solid gaming business, and prospects in artificial intelligence and driverless cars should all keep this stock going strong over the long haul.
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Chris Neiger has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. Tim Brugger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia and Shopify. The Motley Fool recommends Adobe Systems. The Motley Fool has a disclosure policy.