It's been a rough year for growth stocks. Year to date, the Vanguard Value ETF has returned 0.64% at the time of this writing, while the Vanguard Growth ETF has fallen 15.8%. However, Vanguard Growth has trounced the performance of its value sibling over the last 10 years, nearly 2-to-1.
Companies that grow their revenue and profits the most are going to deliver the best returns to investors over many years. Shares of Netflix (NFLX 1.74%), DraftKings (DKNG 0.59%), and Revolve Group are all down this year, but these companies still have enormous expansion opportunities over the long term. Here's why these stocks are poised to recover.
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Volatility in the near term means opportunity for the long term
Jennifer Saibil (Netflix): There are two types of investors who bought stock in pandemic winners. Those who got caught up in high-growth frenzies, and those who were able to see the long-term prospect of companies whose growth was accelerated by dramatic shifts brought on by pandemic behaviors.
Streaming leader Netflix single-handedly dominated its industry for years before streaming stormed viewers when the pandemic started, and early investors have benefited handsomely. Netflix stock soared even higher at the beginning of the pandemic when subscriber count jumped while people were under lockdown, and several competitors joined the streaming ranks at that time. Walt Disney had launched its premium streaming channel Disney+ just prior to the onset of the pandemic as well, and many studios wanted a piece of the action.
But that's winding down now due to three main factors converging together: people are out again, subscriber count in many regions might be near saturation, and the market is crowded. Netflix hasn't impressed with its recent subscriber additions, and even though it added an impressive 8.3 million in the 2021 fourth quarter, that came in below guidance for 8.5 million. For the 2022 first quarter, which will be reported next week, management is expecting a low 2.5 million. Although conservative guidance gives it the chance to beat, it will be a mini-disaster if it doesn't.
That's all near term, though. The company's long-term opportunity remains robust, and historically, companies that are leaders in their industries and have proven themselves over and over again continue to do so. Before the pandemic, Netflix had a cash flow issue because it invested so much money in its content. The only way it posted a profit was to amortize and therefore only partially post those investments as charges, resulting in net income.
Now, sales are so strong that the company is profitable more than on paper, even as it invests in tons of new content to keep subscribers and attract new ones. Its hit series Squid Game from last fall was its most popular ever, and it's funding new shows to create similarly high viewership. Management said it still sees a large market opportunity even in its most heavily subscribed areas, with "ample runway for growth as we continue to improve our service."
Netflix stock is down 42% this year, and shares are trading at the low valuation of 31 times trailing-12-month earnings. If Netflix reports better-than-expected subscriber additions for the first quarter, the share price could jump on the news. But regardless of what happens next week, shareholders should enjoy long-term gains for many years, and at this price, Netflix stock is a screaming buy.
DraftKings is expanding rapidly but is yet to reach profitability on the bottom line
Parkev Tatevosian (DraftKings): The stock market has not been kind to growth stocks in 2022. And the only thing the market dislikes more than growth stocks is unprofitable growth stocks. That's one of the main reasons why I am going to recommend buying DraftKings. This unprofitable growth stock is down 77% off its high in early 2021. DraftKings offers a mobile sportsbook, iGaming, and daily fantasy sports.
Because it is a gambling company, it requires state-by-state approval to operate in each jurisdiction. It has been making solid progress in that regard. DraftKings is now live with a mobile sportsbook in 17 states representing 36% of the U.S. population. iGaming is not as far along, and it is live in five states representing 11% of the population.
With each new state it gets access to, DraftKings invests aggressively in sales and marketing to attract customers. The strategy, if successful, will make it difficult for competitors to poach customers after they have already signed up with DraftKings. Already, DraftKings is demonstrating phenomenal growth. Revenue has increased from $192 million in 2017 to $1.3 billion in 2021. Meanwhile, as of Dec. 31, it has attracted 1.97 million monthly unique active customers, up from 1.5 million the same time the year before. Admittedly, investments in growth are causing big losses on the bottom line, but DraftKings is showing good returns on that investment in the form of revenue and customer growth.
DKNG PS Ratio data by YCharts
The company is still in its early stages of growth with a long runway ahead. The sell-off has DraftKings stock selling at the lowest price-to-sales ratio in its history as a public company. For those reasons, DraftKings is a beaten-down growth stock that is a screaming buy right now.
Revolve is entering 2022 with momentum
John Ballard (Revolve): Revolve is a leading online retailer of apparel, beauty products, and accessories. It uses trend-forecasting algorithms and effective marketing on social media platforms to build its brand, and it's working.
Demand for apparel fell off a cliff in 2020 for obvious reasons, but demand is roaring back heading into 2022. Revolve posted accelerating growth in 2021 with momentum carrying over into the start of 2022. In the fourth quarter, net sales grew 70% year over year and 63% over the same quarter in 2019.
This is not a flash-in-the-pan online retailer. Revolve's competitive advantage is based on leveraging hundreds of millions of data points that it collects from customer interactions and various styles to curate its inventory assortment. Given that Revolve has been around since 2003 and is posting this level of growth nearly 20 years later says it has something that isn't easily duplicated by competing retailers.
The stock is up 58% since its 2019 initial public offering, but the share price is currently down 37% off its all-time high. Retailers that center their business strategy around data science are in the best position to win a growing share of the $1.5 trillion apparel industry over the long term. This mid-cap retail stock could add some juice to a well-diversified portfolio.
