It usually pays off to buy stocks with a long history of market-beating returns when they are down. If nothing has changed a company's ability to continue executing its long-term growth strategy, chances are Mr. Market is just too focused on short-term noise.
A team of Motley Fool contributors recently selected three beaten-down growth stocks to buy now. Here's why they chose Take-Two Interactive (TTWO -0.86%), Walt Disney (DIS 0.83%), and Pinterest (PINS 1.56%).
This top game maker is stacked with growth opportunities
John Ballard (Take-Two Interactive): The growth of the video game industry has provided market-beating returns for shareholders who have stuck with the leaders, including Take-Two Interactive, home of the extremely popular Grand Theft Auto franchise. A $1,000 investment in Take-Two shares 10 years ago would be worth around $12,000 today. The recent pullback in the stock price provides a great opportunity to buy shares ahead of what should be another decade of growth for the company.
While Take-Two has dozens of new releases planned for the next several years, its momentum starts with the ongoing success of Grand Theft Auto V (GTA V). It's telling of Take-Two's ability to produce titles that provide years of entertainment when the game sold more copies in 2020 than in any other period except the year it launched in 2013. GTA V has now sold more than 150 million copies.
The company expects to report a dip in bookings in the current fiscal year, as the industry stabilizes from the spike in player engagement during the pandemic. But even as spending on Take-Two's games has leveled off in the last few quarters, guidance of $3.2 billion in total bookings for the current fiscal year is 61% higher than fiscal 2018, before the launch of Red Dead Redemption 2.
The next launch in the Grand Theft Auto franchise will likely be bigger than the last. On top of that, Take-Two is also launching new free-to-play mobile titles and expanding access of its top games to new channels, such as cloud subscription services. This could be very lucrative for Take-Two given that most of its revenue is generated from in-game spending. Investors have a great opportunity to buy shares ahead of these growth initiatives at a discount right now.
No horrors here, just fun for everyone
Jennifer Saibil (Disney): If you think Disney is just for kids, you're kidding no one. It's a powerhouse entertainment company with the largest content library in the world, multiple revenue streams, and mountains of potential -- and that's more than its theme rides.
Sales growth skidded to a halt in 2020 when parks shut down, but streaming entertainment was the company's savior. Disney+ launched in November of 2019, right before the pandemic, and was an immediate success. It had 116 million subscribers as of the end of the third quarter (ended July 3). Disney also had 15 million paid subscribers for ESPN+, and 43 million for Hulu.
Parks are mostly open at limited capacity, giving Disney one of its best revenue drivers back in some form, and the company managed a 45% year-over-year sales increase in Q3. That was still a 16% decrease from the 2019 number, so it has a ways to go.
But putting the short-term outlook aside, I can't think of any company that can really compete with Disney. Its leverage begins with its unbeatable library; besides being a huge moneymaker as studios release films, it adds to the overall company growth through further monetization in the form of products, park additions, and other media. Netflix, for example, doesn't have that same leverage from its original content, although it's entering some of those spaces.
And the long-term outlook is almost unending. That's because Disney releases new content all the time, which is turns into more revenue-producing materials. Some of its franchises become all-time successes, like Star Wars, and its monetization just keeps compounding over time.
Disney is leaving behind a fright of a year for a golden world of opportunity.
This visually pleasing social media business is selling at a discount
Parkev Tatevosian (Pinterest): Image-based social media platform Pinterest is a spooky good business to consider adding to your portfolio right now. The company's site is free for users to join, and the visual experiences are free to enjoy. Pinterest makes a living by showing advertisements to users, and therefore the more time people spend on its platform, the more money it can make.
But that's not the only factor in its revenue-earning potential. The appetite for advertisers to reach consumers is the other side of the coin. And after falling at the pandemic's onset, marketers' desire to reach consumers is rising fast. That elevated demand for advertising led Pinterest to report a whopping 125% revenue growth year over year in Q2. With the economy reopening, businesses need to get the word out that they are open again.
As people leave their homes more often, they are spending less time on Pinterest, and that caused it to shed 24 million monthly active users (MAU) in its most recent quarter. The company now boasts a total of 454 million MAU, and this drop in MAU was the primary reason for Pinterest's stock price fall. Still, the same factor causing Pinterest to lose MAU (the economic reopening) is leading to a surge in advertising demand. Indeed, Pinterest reported an 83% increase from the same time last year in the price per advertisement it charged marketers in Q2.
What's more, the fall in stock price has Pinterest trading at a price-to-sales (P/S) ratio of 15.8, down from the P/S of 32 it was selling for earlier in the year. The discount may be justified considering the elevated risk from MAU losses continuing. Still, investors can buy this spooky good stock with 454 million MAU that advertisers are clamoring to get access to at a favorable price.