The stock market has done well in 2023, but this year’s rising returns followed dismal performance in 2022. Over the long term, many great companies have made painful cuts to their stock prices.
But their long-term business prospects are no less exciting now than they were before the inflation panic. When people talk about buying great stocks on the dip, this is the bargain opportunity they’ve been looking for.
So we asked some of The Motley Fool’s tech gurus for their best deep-discount stock deals in this turbulent market. Keith Speights suggested a cybersecurity expert SentinelOne (NYSE:S), and Anders Bylund waxed poetic about the media streaming technology specialist Year (NASDAQ: ROKU).
Don’t worry, we made him put down the rhyming dictionary before explaining what’s so great about Roku’s heavily discounted stock.
Roku’s financial fortress stands tall
Anders Bylund (Roku): The market is essentially throwing the market-leading baby out with the dirty bathwater. Today, Roku’s software powers 43% of all smart TV sets sold in North America. No other company can command a double-digit market share. The company will then take the lessons learned from this market-defining performance on a world tour. Roku’s international expansion is off to a great start in vibrant markets like Germany, Great Britain and Brazil. I realize that one-size-fits-all solutions don’t really work for everyone, and that a few countries may prefer another smart media platform in the long run. Still, Roku’s long-term global addressable market is measured in billions of households.
Meanwhile, investors lost patience with Roku stock two years ago. Digital advertising accounts for a significant portion of the company’s revenue, and that market entered a global downturn in 2021. As a result, Roku shares are currently trading 83% below their all-time highs.
This massive discrepancy between great business prospects and cheap stock prices is quite surprising. The stock trades at 3.4 times after-sales price, 4.3 times Roku’s book value and 6.3 times the company’s cash reserves. All these numbers put Roku in the value investing corner of Wall Street.
And the advertising slowdown is once again showing signs of better days ahead. Roku’s revenue growth took a breather in the fall of 2022 and spring of 2023, but came back to life in the recent second quarter update:
And did I mention Roku’s robust cash reserves? I think so, but let’s get back to that brilliant source. The company is leaning on a $1.7 billion pile of cash, and Roku’s balance sheet has no long-term debt. Nil. Nada. Zilch. This company is well equipped to weather even a long and painful storm, but the cloudy sky is already clearing.
Long story short: Roku is a future media giant whose stock has fallen on hard times lately. This has been my favorite stock to buy for almost two years, and it’s still a great buy.
This defeated growth stock has a major upside
Keith Noonan (SentinelOne): SentinelOne has seen volatile trading since its initial public offering (IPO) in June 2021. The cybersecurity specialist’s share price soared and saw strong gains in the following months as excitement about growth stocks shaped the market.
But when macroeconomic pressures hit and the company’s revenue growth slowed, momentum for the stock disappeared. Today, the stock is trading about 78% lower than the price level it reached in November 2021.
SentinelOne provides a cybersecurity platform that uses artificial intelligence to protect hardware devices, cloud networks and data containers from attacks. Although the company’s revenue growth has slowed in recent quarters, it still managed to increase revenue 46% year over year to $149.4 million in the second quarter. Even as many companies pull back on their growth initiatives due to the economic uncertainty ahead, SentinelOne has continued to grow its revenue and customer base at a healthy rate.
The cybersecurity specialist ended the quarter with more than 11,000 customers, an increase of 30% year-on-year, and the company continued to see encouraging customer trends in other areas. The total number of customers generating more than $100,000 in annualized recurring revenue grew 37% to 994, and customers using the company’s platform again increased their spend by more than 15% on average.
SentinelOne’s non-GAAP (adjusted) gross margins are also seeing significant improvement. In the second quarter, the company’s adjusted gross margin increased to 77%, compared to 72% in the year-ago period. For the full year, management targets an adjusted gross margin of 76%, up from 72% last year.
Although the company is still operating at a loss, it ended last quarter with approximately $1.1 billion in cash and equivalents. Based on current cash burn, the balance sheet can support the company for the next three years without having to take on debt or sell new shares. With margins trending in the right direction and revenue still growing rapidly, this beaten-down growth stock looks like a worthwhile pick for risk-tolerant investors.
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Anders Bylund has positions in Roku. Keith Noonan has no positions in the stocks mentioned. The Motley Fool holds and recommends positions in Roku. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.