It's an understatement to say the market has fallen out of love with growth stocks. Since the Federal Reserve indicated it would begin raising interest rates, growth stocks have dived. Higher interest rates lower the present value of future cash flows, reducing what investors are willing to pay for growth stocks.
Netflix (NFLX -0.08%), Airbnb (ABNB 1.03%), and Roblox (RBLX -1.07%) have not been spared from the shellacking. Each has seen its share price fall considerably off its high-water marks. Still, underlying the stocks are solid businesses that could improve over time. Here's why it's an excellent time to buy these beaten-down growth stocks before a market rally.
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Netflix
In addition to the broad market sell-off, Netflix gave the market more reason to sell its stock. In its first quarter, which ended March 31, the company reported its first quarterly decline in subscribers in over 10 years. What's more, it told investors to expect 2 million more losses in Q2. That was all the reason the market needed, and the stock is down 72% off its high.
With 222 million subscribers, the streaming pioneer is the leader in the industry. The scale has boosted Netflix's revenue from $8.8 billion to $29.7 billion in the last five years. In that same time, operating income has risen from $380 million to $6.2 billion. The streaming wars are likely to produce more than one winner, and Netflix is expected to be among them.
The sell-off allows investors a chance to buy Netflix at a price-to-earnings (P/E) ratio of 17.5, near its lowest valuation ever.
NFLX PE Ratio data by YCharts
Airbnb
Airbnb was devastated at the pandemic's onset. Folks' willingness to travel fell meaningfully, and Airbnb's revenue fell 30% in 2020. The worldwide travel facilitator has been thriving since then. The company's revenue is bouncing back higher than pre-pandemic levels, and changes made during the pandemic have allowed profitability to surge higher. Indeed, in its most recent quarter ended on March 31, revenue was 80% higher than in the same quarter in 2019.
Meanwhile, although bouncing back from 2020, worldwide travel demand is still well below pre-pandemic levels. The gap suggests Airbnb has plenty of room to grow as consumers eagerly take long-delayed vacations. Airbnb does not own the properties listed on its platform. Instead, it encourages property owners to list rooms, homes, garages, treehouses, or other unique spaces on the Airbnb platform. The business model allows it to expand supply quickly in response to consumer demand.
Considering that Airbnb's revenue is higher than in 2019, while worldwide travel demand has yet to recover to those levels, it suggests that Airbnb is quickly gaining market share. Like Netflix above, the growth stock sell-off has Airbnb selling at near its lowest price-to-free cash flow.
ABNB Price to Free Cash Flow data by YCharts
Roblox
Finally, Roblox is the metaverse pioneer. The company that caters primarily to the younger generation has rapidly grown revenue and cash flow. Of course, it helped that kids were sent home for remote learning during the pandemic, giving them more time to engage with Roblox.
Sales have exploded from $325 million in 2017 to $1.9 billion in 2021. Roblox is free to join and use, so the company makes money by selling premium items and experiences that require Robux. The company outsources these creations to third-party developers who are promised a percentage of the revenue their designs generate.
The strategy has been great for generating cash flow even though the company is not profitable on the bottom line. Indeed, Roblox's cash flow from operations jumped to $659 million in 2021, up from less than $200 million in 2019 and 2020.
RBLX Cash from Operations (Annual) data by YCharts
Unsurprising by now, Roblox is also selling at close to its cheapest value ever at a price-to-free cash flow of about 32.
The widespread pessimism from growth stock investors has these excellent stocks trading at bargain prices. Investors can buy now before a market rally eliminates the opportunity.
