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These Nasdaq Growth Stock Favorites Are Falling -- Time to Sell?

By Dan Caplinger – Nov 17, 2021 at 12:33PM

Key Points

  • The Nasdaq had modest losses on Wednesday morning.
  • Shares of Roku and DLocal took more substantial hits.
  • Both stocks face challenges but still appear to have attractive long-term prospects.

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Find out why investors are losing some confidence in these two high-flying businesses.

Wall Street has been on a roll lately, and the Nasdaq Composite (^IXIC) has taken full advantage. Even on a down day for the markets on Wednesday, the Nasdaq was able to limit its losses, falling just a tenth of a percent as of 11:15 a.m. ET.

Increasingly, though, investors have seen individual Nasdaq stocks come under pressure. Even some of the favorite growth stocks within the investing community have proven vulnerable to such declines, and Wednesday morning, steep drops in Roku (ROKU 6.48%) and DLocal (DLO 1.78%) raised some questions about the long-term sustainability of their growth. Below, we'll look at what sent each company's stock lower and what the news means for growth investors more broadly.

Roku deals with a loss of confidence

Shares of Roku were down almost 10% near midday on Wednesday. The negative reaction from shareholders came amid downbeat comments from Wall Street analysts.

Four people sitting on a couch apparently watching TV.

Image source: Getty Images.

The anti-Roku sentiment came from a couple of sources. Late Tuesday, Truist reduced its price target on Roku by $30 to $360 per share, arguing that supply chain issues could reduce advertising demand on the platform and affect Roku's revenue. Nevertheless, Truist kept its buy rating on the stock.

That wasn't the case for analysts at MoffettNathanson, which cut their rating on the stock from neutral to sell and put an even more bearish $220 per share price target. MoffettNathanson didn't mince words, saying that the expectations for long-term revenue and earnings growth for Roku were simply too high and that valuations were therefore stretched.

Roku has indeed seen its subscriber growth and streaming hour volumes appear to hit a plateau in recent quarters, and it's unclear whether the company can find new ways to woo viewers. With so much competition for eyeballs in the media space right now, Roku will have to keep proving its leadership in the industry in order to support its stock price.

DLocal descends

Meanwhile, shares of DLocal were down 21%. The move came following a third-quarter financial release that didn't meet high expectations from shareholders for the Latin American payment platform.

DLocal's numbers didn't look so bad at first glance. Total payment volume more than tripled year over year  to $1.8 billion, and revenue and net income more than doubled from year-ago levels. Net revenue retention rates of 185% showed how sticky DLocal's payment platform is, and revenue from new merchants was notably higher from where it was a year ago.

However, investors had hoped to see better results from DLocal. Moreover, results from other payment providers across the Latin American region have helped support the thesis that rising competition could make the industry environment tougher for all of its players, and investors seem to be letting some of the air out of their bullish thesis for the fast-growing niche.

Despite some short-term pressure on these two stocks, however, both companies seem to have their fundamental business strategies intact. That's a positive sign for investors, and it makes bailing out simply on the basis of one subpar news item appear to be premature.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Roku. The Motley Fool has a disclosure policy.

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