The market has punished growth stocks over the last year, and that trend could continue well into 2023 due to several factors. For instance, the Federal Reserve is planning to further increase benchmark interest rates in its ongoing effort to tame high inflation, but that's creating a more difficult environment for growth-oriented businesses. But none of that should scare investors. Companies with solid operations will find ways to navigate even challenging economic landscapes.
And businesses like that are worth serious consideration, whether or not they are currently doing well. In that spirit, let's examine the investment theses for two growth stocks that have moved in different directions on the stock market this year: Vertex Pharmaceuticals (VRTX 1.27%) and Shopify (SHOP 3.85%). Here is why both are solid stock picks heading into 2023.
1. Vertex Pharmaceuticals
Biotech giant Vertex Pharmaceuticals has defied gravity all year. For those who closely follow the drugmaker, that isn't surprising. It isn't just delivering solid financial results, it is also positioning itself for long-term growth.
Let's start with the company's earnings. In the first three quarters of 2022, it reported total revenue of $6.6 billion, representing a year-over-year increase of 20.5%. For a biotech company of this size, double-digit-percentage top-line growth is excellent. Meanwhile, Vertex Pharmaceuticals' adjusted earnings per share soared by about 67% to $11.12 compared to the prior-year period. It also ended the period with $9.8 billion in cash and equivalents on the books, an increase of 40% year over year.
Turning to Vertex Pharmaceuticals' long-term prospects, it's on the verge of key regulatory submissions. The drugmaker plans to request approval for exa-cel in Europe by year's end, and it should do the same in the U.S. by the end of Q1 2023. Exa-cel is a gene-editing treatment for sickle cell disease and transfusion-dependent beta-thalassemia that Vertex developed in partnership with CRISPR Therapeutics. There aren't many effective treatment options for either of those conditions yet, but a single treatment with exa-cel could provide a functional cure for both of them.
The partners will initially target a market of 32,000 patients across beta-thalassemia and sickle cell disease in the U.S. and Europe. Suppose this treatment will be priced at $1 million, and assume that Vertex Pharmaceuticals and CRISPR Therapeutics will treat 15,000 of those patients. That rounds up to $15 billion in sales. A $1 million price tag for a gene-editing therapy is not out of line with the market. Zolgensma, Skysona, Zynteglo, and Hemgenix are all gene-editing therapies that cost between $2.1 million and $3.5 million per treatment.
Assuming that exa-cel earns regulatory approval and revenues from it begin to flow in and complement Vertex's highly successful cystic fibrosis franchise, the company's financials will improve further. Vertex is also making progress on other pipeline candidates. For example, it recently initiated a pivotal clinical trial for VX-548, a potential treatment for acute pain. Five years from now, Vertex's lineup should look even stronger, with at least a couple of new approvals by then. The company is far from being done beating the market, making it an excellent biotech stock to buy and hold.
2. Shopify
Shopify is currently struggling, and its shares are down 72% this year. On the one hand, that's not surprising. Inflation at near 40-year highs has led consumers to rein in their discretionary spending, e-commerce growth cooled following the pandemic boom, and geopolitical tensions aren't helping investors keep a positive outlook. But how often will Shopify deal with such a scary combination of headwinds?
Investors can expect that inflation will eventually ease, given the Fed's aggressive efforts to stem it. Indeed, based on the data from the past few months, it appears to have peaked already, and the latest numbers came in below expectations. It's difficult to predict how the geopolitical landscape will evolve, but even there, things won't stay as bad as they have been forever. Also, the e-commerce sector is merely reverting to its pre-pandemic growth trends. Analysts at Grand View Research project it will grow at a compound annual rate of 14.7% through 2027.
Shopify is well-positioned to profit amid that growth. It has created an ecosystem that provides merchants with everything they need to run online stores and options to integrate various aspects of their brick-and-mortar operations. Once companies join Shopify's network, they tend to find it hard to leave because switching costs are high, both in money and time.
Further, Shopify has already reached an impressive position in the market. In 2021, its network accounted for 10.3% of all retail e-commerce transactions in the U.S. -- second only behind Amazon.
Shopify's top-line growth has indeed slowed recently. In the third quarter, the company's revenue increased by 22% year over year of $1.4 billion, much slower than what shareholders were accustomed to before this year.
Shopify is also unprofitable at the moment, with an adjusted net loss of $30 million in Q3 compared to its adjusted net income of $102.8 million in the prior-year period. Even so, Shopify's solid position in the e-commerce industry, coupled with its competitive edge, should allow its share price to recover from its recently terrible performance. That may or may not happen next year, but it will eventually, which is why I do not intend to sell my shares of Shopify any time soon.
