One of my favorite pairings when looking for new investments to buy is the simple match of declining prices and high expected revenue growth.
In today's market, we have no shortage of this investment style to choose from -- particularly in the technology sector.
Consider the following chart of three stocks that were once considered darlings of the tech landscape.
ROKU data by YCharts.
Now that they are trading at significant discounts, it is time to revisit our investment thesis for each stock and see how adding to them could help fund an early retirement.
Image source: Getty Images.
1. Roku
If you believe viewers will continue to shift from linear to streaming TV while advertisers do the same with their massive budgets, buying Roku (ROKU -0.97%) shares for the long haul could be just the ticket for you.
While more commonly associated with its players and Roku-enabled TVs, the company generates 81% of its sales from platform revenue, with only the remaining 19% coming from hardware.
These platform sales come from advertising, content distribution, and media and entertainment promotional spending. Together, these sources generate an alluring gross profit margin of 60.5% -- juxtaposed to the player segment's -28.4% gross profit margin amid supply chain issues.
Led by the success of this burgeoning platform segment, Roku's share price spiked nearly 2,000% after its initial public offering in 2017, but it has seen this price slide by over 70% in just the last six months.
Dropping partially out of sympathy for the suddenly declining user count at its former parent company, Netflix, Roku now trades at just 5.2 times sales -- its lowest mark since late 2018.
ROKU PS Ratio data by YCharts.
However, one difference between Roku and Netflix shows why the former may be a step ahead in the streaming space.
During its first-quarter earnings call, Netflix and its CEO Reed Hastings hinted at the idea of offering a lower-priced, ad-supported tier on its platform -- essentially chasing a moving puck that is sliding to where Roku is already waiting.
If nothing else, this seems like a vote of confidence for Roku's promising business model.
Reaching an estimated 80 million people in the U.S. during the fourth quarter, the ad-supported Roku Channel doubled its total hours streamed year over year, highlighting the rapid adoption of free, ad-supported linear streaming TV.
Bolstered by this growth, look for Roku to continue seeing gains in its average revenue per user (which grew by 43% in 2021) and build upon its newfound profitability.
ROKU Net Income (Quarterly) data by YCharts.
Thanks to this nascent profitability, analysts' projections for 40% sales growth in 2022, and the megatrends supporting its platform operations, Roku looks poised to remain an integral component of the broader streaming industry.
2. Shopify
As entrepreneur-enabling Shopify (SHOP -2.68%) has traded down over 73% over the last six months, it is reasonable for investors to fear that its investment thesis has spoiled -- but that worry couldn't be farther from the truth.
On the contrary, Shopify's suite of offerings and overall ecosystem for businesses has fortified its positioning in the e-commerce industry, despite the market selling off the stock amid slower growth rates.
Riding the megatrend of a decades-long shift toward direct-to-consumer purchases, Shopify has amassed a 10.3% market share of United States e-commerce retail in 2021.
While 2021's sales growth rate of 57% was indeed a deceleration from 86% in 2020, the fact remains that Shopify's revenue has tripled since 2019.
SHOP Revenue (TTM) data by YCharts.
Best yet for investors, gross profits have followed closely with this sales growth, setting investors up for strong profitability as the company matures.
To highlight the impact Shopify has on the e-commerce landscape, consider that the company now has seven customers that have gone public on the stock market -- a feat considered the pinnacle of success for many start-ups.
Through its full-featured suite of business solutions -- including its apps, shipping, point of sale, payments, capital, and fulfillment offerings -- Shopify is beginning to eye the international markets through its partnership with Global-e Online.
Thanks to the immense potential of this global expansion, analysts' expectation for 40% sales growth in 2022, and the long-term direct-to-consumer megatrend working in the stock's favor, Shopify makes for a fantastic lifelong holding.
Image source: Getty Images.
3. Sea Limited
Multifaceted e-commerce and gaming juggernaut Sea Limited (SE 1.41%) looks poised to show just how valuable optionality and diversification can be over the long term.
The company's investors (myself included) have been on a wild ride. Amid the broad technology sell-off and Sea's gaming unit (Garena) facing trouble thanks to India banning its Free Fire game due to privacy concerns, Sea's stock is down over 75% in the last six months.
However, Sea's e-commerce unit, Shoppee, is expected to record positive earnings before interest, taxes, depreciation, and amortization (EBITDA) this year in its core geographic markets of Southeast Asia and Taiwan. Furthermore, its fintech unit, SeaMoney, grew sales by 711% during the fourth quarter of 2021 and is expected to be cash-flow positive by 2023.
These expectations are massive for Sea shareholders as they will help remove reliance upon Garena to be the company's cash machine for funding growth.
And before we get carried away with the doom and gloom surrounding Garena, it still grew Q4 bookings and quarterly paying users by 7% and 6% year over year, respectively, despite its challenges in 2021.
Thanks to this continued success in Garena and the budding profitability From Shoppee and SeaMoney, the company has begun to see significant efficiencies flow through its operations.
SE Revenue (TTM) data by YCharts.
With gross profits rising four times as quickly as sales in the last three years, watching this margin expansion over the upcoming quarters will be fascinating.
This pairing of Sea boosting its margins along with analysts' expectations for 61% sales growth in 2022 put the company in an excellent position to generate outsized cash flows as it matures over the long haul.
