3 Beaten-Down Stocks Investors Should Be Buying Hand Over Fist

Even the best stocks pull back now and again, giving investors opportunities to buy at discounted prices. If you are not paying attention, you might miss these once-in-a-blue-moon chances. We asked three Motley Fool contributors to each pick one company that's down considerably off its high and that is being underestimated by the market.

They picked Roku (ROKU -10.29%), Fastly (FSLY 4.43%), and Zoom Video Communications (ZM 1.57%).

Image source: Getty Images.

Roku: Summertime blues

Danny Vena (Roku): There's little doubt that cord-cutting has reached epic proportions. Pay-TV subscribers have declined by more than 23.5 million since peaking in early 2012. Last year alone, more than 5.1 million customers cut the cord, marking the worst year of losses on record. The migration to streaming is undeniable and the biggest beneficiary of this trend is Roku.

Roku provides a host of boxes and devices that provide access to all the major streaming services, but it doesn't stop there. The platform has more than 10,000 streaming channels on its platform, providing options for even the choosiest viewer. This includes both paid and ad-supported channels, with something for everyone.

The company has a superpower that's unknown to many investors. Roku developed a smart TV operating system from the ground up -- rather than repurposing a mobile OS -- which the company licenses to TV makers. As a result, the Roku OS has become the No. 1 selling connected TV operating system in North America, notching 38% market share in the U.S. and 31% share in Canada. 

Roku is the leading streaming platform worldwide, stealing the crown from Amazon's Fire TV last year. To close out 2020, Roku had 51.2 million active accounts, up 39% year over year, while Amazon reported 50 million accounts, up 25%. 

Additionally, and unbeknownst to many investors, Roku is becoming a powerhouse in the digital advertising space. Many associate the company with its namesake streaming devices, but those merely act as a gateway to bring viewers onto Roku's platform. The company makes the lion's share of its profits from digital ads that appear on its platform. Roku gets roughly 30% of all the ad space for streaming channels on its platform. The company then uses its DataXu advertising platform to better place those ads in front of their target market.

Finally, as a result of short-sightedness by some investors, Roku is selling at a discount. When the company reported its second-quarter results in August, streaming hours had grown just 19% year over year, while active accounts had grown 28%. However, given the recent pandemic reopening in many locations, coupled with regular summertime activities, it isn't surprising that the growth in these metrics would decelerate. Short-term thinking by some investors has caused Roku stock to tumble more than 35% from recent highs. 

It won't be long before the streaming pioneer's blockbuster results resume, so investors should be buying Roku stock hand over fist.

Image source: Getty Images.

Fastly: An edge computing platform that could deliver investors more than content 

Will Healy (Fastly): Investors spent most of the year selling Fastly as a platform outage in June and slowing revenue growth amid post-pandemic reopenings caused investors to turn negative. As a result, they have watched this stock lose about two-thirds of its value compared with its 52-week high in February.

Fastly stands out because of its content delivery network, a group of servers used to deliver speedy internet service. In addition to the necessary infrastructure for edge computing, it also offers the developers the ability and flexibility to set and configure these systems according to the user's needs.

Fastly continues to land new clients, attracting social media landing page company LinkTree and its 16 million users with its edge platform. However, it seems to have struck a higher-profile deal by landing Apple. According to multiple sources, Fastly and other CDN providers have made a deal with Apple, adding a security feature for iCloud called Private Relay. This allows iOS users to browse Safari with such a level of encryption that neither Apple nor network providers can monitor a user's behavior.

Moreover, the company seems to have repaired its relationship with Amazon. CDN Planet, a web performance consultant, reports that Amazon appears to have moved some traffic back to Fastly after removing that traffic following the June outage.

Nonetheless, even with its client base, the financials point to both bright spots and challenges. For the first half of 2021, Fastly reported revenue of $170 million. This amounts to a 23% increase compared with the first six months of 2020. However, net losses more than quadrupled to $109 million in that period as operating costs climbed 86% to $199 million and interest expenses more than tripled to $2.1 million.

Considering that expenses still exceed revenue, one might wonder whether it is time to buy Fastly right now. The price-to-sales ratio of 14 is close to pre-pandemic levels and well below the peak sales multiple of 48 in the summer of 2020. With that low valuation and the growing client base, more investors could decide that Fastly's potential could ease their doubts.

Image source: Getty Images.

Zoom: Business is up, but the stock is down

Brian Withers (Zoom Video Communications): High-growth stocks often take a dive when revenue gains slow down, and Zoom Video Communications is no exception. With growth backing off the amazing triple-digit year-over-year leaps during the coronavirus, the stock is more than 50% off its high. It seems the market has left the stock for dead, but its customers haven't by any means. The most recent results bear this out.

Data source: Zoom earnings releases. QoQ = quarter over quarter. YoY = year over year.

Revenue growth is still pretty impressive, but its outlook has revenue growth slowing to 31% in the third quarter and 16% in the fourth quarter. That's a far cry from its peak growth of 369% in the fourth quarter of last year. This may be disappointing to investors, but just about every other metric has improved over the course of the coronavirus pandemic. Customers spending more than $100,000 annually are still growing at a rapid pace of triple-digit year-over-year growth. The remaining performance obligations (the value of all open contracts not executed) is a record $2.3 billion and grew 13% sequentially from last quarter. Operational cash flow is an amazing 46% of revenue and the company is sitting on over $5 billion in cash and cash equivalents.

The elephant in the room for investors is this question: What will happen to Zoom when companies go back to the office? You might be surprised, but this could be a tailwind for the company. Its Zoom Rooms and phone products are popular, but need to be used in the office. It's likely enterprises aren't too focused on upgrading the tech in offices right now. These two products could help solidify Zoom as a single communications provider for enterprises as these new offerings take hold.

Lastly, the market hasn't rewarded Zoom's improved metrics with a better price-to-sales ratio. In fact, its valuation is even lower than it was before the pandemic at a reasonable 23. This stock is beaten down, but the prospects for Zoom's future couldn't be better. This is one stock you should consider buying a nice chunk of before the market wakes up to its bright future.