Since the coronavirus market crash, stocks have been on a historic bull run. Over the past year, the S&P 500 and the Nasdaq Composite indices have surged in value a stunning 50% and 70%, respectively.
But there are some signs the rally is running out of steam. Tesla and Palantir -- two stocks retail investors love -- are down over 20% from their peaks in January and are representative of a whole class of stocks that are well off their peaks earlier in the year. The drops have some analysts speculating about whether we are heading for a major crash or just a brief correction.
What most savvy investors know is that periodic stock market pullbacks are inevitable. It's a matter of "when," not "if." They also know that during a market crash, all stocks tend to get taken down in the rush to sell. This creates opportunities for those savvy investors to scoop up stock in great companies at a discount. That even includes two hot growth names like Roblox (RBLX 14.03%) and Sea Limited (SE 9.09%).
1. Roblox goes beyond gaming
Founded in 2004, Roblox is a platform where users play games created by other users.
Before the COVID-19 pandemic, Roblox was already very popular among young children. But the crisis fired up Roblox's growth, just like it did for many other gaming companies. Stuck at home during the lockdown, people turned to games and socializing in Roblox's simple, but imaginative, worlds.
As a result, Roblox's daily active users almost doubled last year, while revenue shot up 68% in the first nine months of 2020 to $589 million. In 2020, more than 32 million users played and interacted across Roblox's massive virtual worlds, every day. That makes Roblox even more popular than Fortnite, which had about 31 million daily active users that year.
All this is impressive, but Roblox is just getting started. As new users enter Roblox, they will invite their friends to join up. And as Roblox's user numbers grow, developers will have all the more reason to create exciting experiences. These games, in turn, retain existing users and attract even more users.
In the next few years, Roblox has exciting levers for growth. It has partnered with gaming giant Tencent to enter the Chinese market, as part of a global expansion drive. And beyond gaming, Roblox wants to expand into a platform for virtual classrooms, meetings, and other gatherings. Think Zoom Video Communications, but for the metaverse.
Roblox is a great company but comes with a fair amount of risk. For one, it is still unprofitable -- despite the recent surge in revenue. As Roblox pours money into expansion, it might stay in the red for years to come. And while Roblox has a bright future, much of it is already baked into this stock. It trades at an eye-popping 54 times trailing 12-month sales -- making it an especially risky bet at this price.
2. Swimming in a Sea of opportunities
Sea Limited was one of 2020's best-performing stocks, soaring in value over fivefold through the year.
As a triple play on gaming, e-commerce, and digital finance, Sea rode the same COVID-19 trends that propelled Tencent, MercadoLibre, and Square in 2020. Revenue at Sea's cash cow gaming arm rose 78% to $2 billion, thanks to a surge in active users and paying users. And for the second year in a row, Sea's self-developed game, Free Fire, was the most downloaded mobile game globally. That's no mean feat, considering the thousands of new games launched every year. Shopee, Sea's e-commerce business, grew even faster than the gaming division. Revenue jumped 160% to $2.2 billion, driven by swelling gross merchandise volume and a higher take rate.
While 2020 was a blockbuster year for Sea, 2021 looks just as promising. This year, Sea expects gaming division bookings to rise 38%, while e-commerce revenue should more than double again. Meanwhile, Sea's digital finance arm -- its smallest business division -- is picking up serious momentum. Quarterly paying users hit 23.2 million in the fourth quarter of 2020, up from 15 million in the second quarter.
But that's not all. Borrowing a page from Tencent, Sea has just launched Sea Capital, a $1 billion investment fund to bet on promising tech companies. David Ma -- a former partner at famed tech investor Hillhouse Capital -- will manage Sea Capital.
While Sea's opportunities are exciting, they don't come cheap. At about $250 a share, Sea trades at over 28 times trailing 12-month sales. Tencent -- the world's biggest gaming company -- trades at less than half that multiple.
Like Roblox, Sea is a business with incredible growth potential. But the steep valuations of both stocks offer no margin of safety. Hence, investors should wait for a better entry point -- such as during the next market correction -- before placing their bets on these two growth companies.