This market has gone crazy. As of this writing, the S&P 500 and Nasdaq-100 indexes are down a respective 18% and 29% from all-time highs. However, those large-cap stock-heavy indexes are hiding more serious pain. Many stocks are down by far more.
Take Roku (ROKU 0.15%), LendingClub (LC -0.12%), and PayPal Holdings (PYPL 0.64%), for example, each down at least 75% from their highs. Despite the serious pain, though, three Fool.com contributors think each is a buy right now. Here's why.
Image source: Getty Images.
Roku: Soaring sales and plummeting stock prices
Anders Bylund (Roku): Media-streaming technology expert Roku is one of my favorite long-term investments. It's also a stock on fire sale today, down more than 81% from last summer's all-time highs. So you get to invest in a company of top-shelf quality at a bargain-bin share price. Where do I sign up?
Roku may not look cheap from the standpoint of traditional value metrics. Shares are changing hands at 99 times trailing earnings, 64 times free cash flows, and four times sales. Dyed-in-the-wool value investors are reaching for their smelling salts and water bottles by now. This is not what they are looking for.
But growth investors like yours truly also noticed that Roku's sales are soaring at a compound annual growth rate of 47% over the last five years. Here's what that looks like:
ROKU Revenue (TTM) data by YCharts
Furthermore, Roku is already far enough into its long-term growth story to generate reliable bottom-line profits and free cash flows. Most hypergrowth stocks can't make that claim.
The company is a global leader in user-friendly platforms for digital media services, setting Roku up for tremendous success as that market continues to take the baton from the old-school cable, satellite, broadcast, and cinema sectors. Don't forget that Roku is a winner no matter which media services people choose to consume on smart TVs and media dongles powered by Roku's software. And, Roku is also widening its revenue streams with video-based advertising and some original content of its own.
Roku's stock is down due to overblown market fears, and it's a smart move to pick up a few shares at these rock-bottom prices.
This fintech has been beaten down on sector-wide fears, but its new business model is thriving
Billy Duberstein (LendingClub): LendingClub stock is down 74% from its 52-week highs set back in November and more than 90% from its all-time highs back in late 2015. With that kind of performance, you would think the business itself was performing badly; yet in stark contrast, one could argue that LendingClub's business is performing better than it ever has.
LendingClub began its corporate journey as a platform that used big data to underwrite personal loans at lower rates than credit cards. It then sold those loans to yield-seeking investors. But as Upstart Holdings investors are learning now, platforms depend on loan volume and partner banks and investors willing to buy loans. In economic downturns, the fear is that loan demand could dry up.
However, last year, LendingClub closed on the important acquisition of Radius Bank. This acquisition has been truly transformative for LendingClub. First, it lowers regulatory costs, and allowed LendingClub to take on its own deposits, lowering its funding costs. LendingClub now plans to hold between 20% and 25% of its loans on its balance sheet, while still selling the remainder to other investors through its marketplace.
The hybrid model is ideal for flexibility and economics. LendingClub now earns much more revenue and profit per origination, from its net interest income on loans held on the balance sheet. The balance sheet also allows for flexibility if loan demand from partners slows for a period. Meanwhile, its marketplace still allows LendingClub to cast a wide net of customers and gain more leverage out of its direct marketing costs.
While LendingClub is down significantly over the past two months, it has actually beaten revenue and earnings in the two earnings reports it's delivered since then. Last quarter, LendingClub beat its guidance handily for revenue and earnings, and raised its full-year guidance, in contrast to Upstart. At the midpoint of the new guidance, LendingClub expects $1.2 billion in revenue, up 47%, and $155 million in net income at the midpoint. At today's $1.32 billion market cap, that's a forward P/E ratio of just 8.5.
It's hard to justify that valuation based on LendingClub's current growth trajectory. While a recession may increase charge-offs, LendingClub has made a concerted effort recently to target prime customers with FICO scores above 700 and incomes above $100,000. Meanwhile, LendingClub continues to roll out more Lending products, such as auto loans, which are a small part of originations but growing fast.
All in all, LendingClub has been caught up in the fintech sell-off, but it's a much more profitable business and a cheaper stock than many of its peers. For long-term investors, shares look awfully tempting down here.
A top brand among a crowd of online payments competition
Nicholas Rossolillo (PayPal): These days, there are online commerce payment options galore. PayPal is the biggest of the big, but it also could be considered a legacy technologist at this point. Companies like Block are more nimble and growing far faster than PayPal is. Tech giants like Apple and Alphabet's Google have also been elbowing in on PayPal's turf, not to mention the small upstarts.
Nevertheless, when it comes to online and app-based payments, PayPal and its Venmo subsidiary remain a formidable foe when it comes to competing for the youngest generations of consumers. In fact, according to Piper Sandler's spring 2022 "Taking Stock With Teens" report, Venmo and PayPal ranked Nos. 2 and 4, respectively, as young people's favorite payments app (Apple Pay was No. 1, and Cash App No. 3 three). And PayPal's "Pay in 4" was the favorite buy now, pay later (BNPL) service.
That's all well and good, but the financials are what really matter. The company is experiencing a serious slowdown from early pandemic-growth levels and expects currency exchange rate neutral revenue growth of 11% to 13% in 2022 (or 15% to 17% when excluding eBay, which is parting ways with PayPal with its own digital checkout service). Free cash flow is expected to dip roughly 10% this year as well to about $5 billion as the company invests to keep its large user base engaged.
This is a difficult time to be a PayPal shareholder as it matures from high-growth business to a more slow-and-steady blue chip, but the 75% drop from its all-time high last year looks like a buying opportunity to me. The stock currently trades for just 19 times free cash flow. If PayPal can continue to manage steady expansion and realize profit margin expansion as it scales, this could be a long-term value right now.
