Investing in stocks for the long term can be an effective way to build wealth. However, the path to increasing stock values is rarely an upward straight line. More frequently, it is charted with several peaks and valleys. Long-term investors with the courage and discipline to hold or buy stocks during major crashes are sometimes rewarded with exponential gains.
If you have extra cash you will not need for several years for life's necessities, you can buy stocks with good long-term prospects that are down due to short-term causes. Chegg (CHGG -0.39%), Peloton (PTON 0.32%), and Skillz (SKLZ 1.85%) are three stocks you can buy right now that are down over 50% while their long-term prospects remain intact.
Chegg is an education technology company with a subscription business model. It caters primarily to college students by offering help with course curriculum. Chegg's platform has over 70 million step-by-step solutions to answers that students may have difficulty understanding. Chegg has built this database through student requests. In addition to having full access to existing content, students can ask 20 questions per month answered by subject-matter experts with their subscription. These questions and answers are then added to the database for all students to view.
That's a lucrative business model because Chegg pays for that content once and gets the benefits for several years. The college curriculum does not change much over the years, so the assets pay dividends for decades. Chegg is already starting to capture the benefits of scaling to a more significant subscriber and revenue base. Indeed, from 2015 to 2020, operating profit grew from a loss of $57 million to a positive $57 million.
Nevertheless, the stock is down 67.5% in 2021, with most losses coming after Nov. 1. That's when the company lowered the forecast for the rest of the fiscal year, citing a significant drop-off in student enrollment.
Peloton sells interactive exercise equipment and a subscription to live and recorded exercise classes. The company was already gaining popularity before the pandemic increased the demand for in-home exercise equipment. As a result, revenue more than doubled to $4 billion in fiscal 2021.
Once a customer signs up, they tend to stick around. Peloton boasted a membership retention rate of 92% in its most recent quarter ended Sept. 30. The company has a robust selection of live and recorded classes and makes members feel part of a community.
Peloton had 2.5 million connected fitness subscribers at the end of the quarter, and management is forecasting that it will grow to 3.4 million by the end of fiscal 2022. Still, that would be a small part of the number of people that regularly exercise -- leaving Peloton with a long runway for growth.
Peloton's stock is down 72% in 2021, mainly because economic reopening slowed the demand for in-home exercise equipment. That being said, Peloton's sales are growing on top of last years' elevated levels.
Skillz is a gaming company with a unique twist: It allows contestants to wager on their games and doles out cash prizes to winners. The company's business is not considered gambling because the games on its site are based on skill. In other words, winners win because they are better at the game and not because of chance. Of course, if you have money on the line, you engage with the games more seriously than you would otherwise.
In its most recent quarter, the company boasted 0.51 million monthly active users, up from 0.35 million in the year before. Still, the growth is not pleasing investors because the company is spending so heavily on sales and marketing. Skillz spent 112% of revenue on sales and marketing in its most recent quarter. Investors feel it should be getting better results from that spending. The stock is down 57.8% in 2021.
Each of these three stocks is down big because of short-term catalysts. That could be an excellent buying opportunity for long-term investors who want to buy these growth stocks at more than 50% off their highs.