Buying shares of growing companies after they have fallen sharply can be a rewarding investment strategy, but it’s important to understand the key factors that allow a company to stage a comeback.
Roblox (NYSE: RBLX), RV (NYSE:RH)And Year (NASDAQ: ROKU) are all trading well above their highs, but three Motley Fool contributors believe these fallen growth stocks are ripe for the picking.
65 million users and growing
John Ballard (Roblox): Roblox is one of the most popular online entertainment platforms for kids and teens. The company’s quarterly revenue, which is generated from advertising, premium subscriptions and purchases of user-generated content and in-game currency, has nearly tripled over the past three years, but that hasn’t stopped the stock from plunging 80% from compared to its peak.
The culprit appears to be weak profitability. The company reported a loss of $282 million on $680 million in revenue in the second quarter. But there are a few reasons to think this could change the situation.
Roblox has a growing number of daily active users (DAUs). The company ended the second quarter with 65.5 million DAUs, up 25% from a year earlier. Content spending slowed in 2022 due to high inflation, but Roblox’s audience is starting to spend more money again and revenue rose 15% year over year in the quarter. There is no better antidote to poor profitability than growing sales.
Another reason to like the company’s prospects is that Roblox has a geographically diversified user base. In fact, the platform’s fastest growth is coming from overseas markets such as the Asia Pacific region, where revenue grew 30% year over year last quarter.
Roblox’s lack of earnings is a negative, but if you invest with a long-term view, this stock could be a big winner for you over the next decade. The company has a long road to growth. All investors need to do is look at the recent increase in the number of employees.
In the second quarter, Roblox increased its workforce by 26% year-over-year, from 1,900 employees to approximately 2,400. That speaks to the opportunities management sees in the near future in an environment where many other tech companies have laid off employees. This is a company with more momentum behind the scenes than the market gives it credit for.
Still a winner in the long run
Jeremy Bowman (right): You only have to look at RH’s latest earnings report to know that things aren’t great for the luxury retailer right now. Sales and profits are down, and CEO Gary Friedman readily admits that the slowing housing market and higher mortgage rates have created challenges for the luxury home furnishings company formerly known as Restoration Hardware.
However, despite the short-term challenges in the home furnishings industry, RH still appears well positioned to benefit from a number of long-term trends. These include:
- A significant housing shortage in the US, estimated at 4 million homes. That gap will have to be narrowed, and homebuilders are already working on it. As the doors close, these new homes require new furnishings, supporting demand for RH’s products.
- American homes are growing larger due to consumer preferences and trends like remote work, which have also increased interest in second homes. Larger houses and more homes mean a greater demand for furniture.
- The Federal Reserve expects to lower the Federal Funds Rate to about 2.5% to 3% over the next two to three years. The decline in market interest rates influenced by the benchmark should help support a recovery in the housing market, which would be a boon for RH.
In addition to this broader tailwind, the company is expanding into Europe. It recently attracted a lot of press attention for the opening of its first gallery in Britain, and is expanding the brand beyond home furnishings, opening a restaurant and a hotel, renting out planes and yachts and launching a streaming service focused on architecture and design. These moves should help the company tap into brand loyalists cultivated through RH’s membership program, allowing the company to grow beyond the home.
Friedman is an industry visionary and his bold thinking has delivered huge returns for dip buyers in the past. In 2016, shares plunged after Friedman converted the company to a membership model, but shares rose in 2017 and 2018 as that decision paid off for the company. This sell-off, which saw the stock down 57% from its 2021 peak, could present a similar opportunity.
Focus on the future
Jennifer Saibil (Roku): Roku was one of the biggest winners of the early pandemic bull market, and then one of the biggest losers in the period that followed. It is now down 83% from its 2021 high, even though it is up 95% this year.
Roku stock is rising again as investors recognize its potential. It’s gaining customers and generating higher revenues, and as people continue to increase the share of their viewing time on streaming services, it’s uniquely positioned to benefit thanks to its popular operating system and free streaming model.
In the second quarter, revenue increased 11% year-over-year, with strong revenue from both devices and platforms. The number of active accounts increased 16% year-over-year and 1.9 million consecutively to 73.5 million, and streaming hours increased 21% year-over-year.
Roku’s platform revenue, which comes primarily from advertising, accounted for nearly 90% of revenue, and this is where the biggest opportunity lies. As viewers continue to switch to streaming, advertisers are also spending their dollars. This segment has suffered as advertisers cut budgets in the high inflation environment as they feared a recession, but that will be a huge growth catalyst as they open their wallets again.
The Roku Channel – the company’s flagship free ad-supported streaming service – accounted for 1.1% of total streaming hours in the US in July, according to Nielson, and as it adds more accounts and hours, it would attract more advertising dollars have to bring in.
Meanwhile, profits are under pressure. Roku is posting net losses again after briefly turning profitable in 2021 when sales soared, and this situation is not expected to reverse in the near future. But it should also change if Roku generates higher sales. This won’t happen overnight, but if you can focus on the long term, Roku can be an excellent addition to your portfolio.
Roku stock is currently trading at about 3.5 times its twelve-month revenue, which is a bargain when you consider its odds. Now is a good time to buy as the price is rising again.
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Jennifer Saibil has no positions in any of the stocks mentioned. Jeremy Bowman has positions in RH and Roku. John Ballard has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Roblox and Roku. The Motley Fool recommends RH. 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.