The stock market has experienced turbulent trading since rising inflation forced the Federal Reserve's hand in raising interest rates. The sell-off has taken down Netflix (NFLX -0.63%) by 70% and Roblox (RBLX 1.35%) by 75%.
Of course, these two growth stocks have other issues pulling them down as well. Common among them is that they were beneficiaries of the stay-at-home trend that is now reversing. Let's look closer at what's dragging down these two growth stocks to determine if the crash is a good buying opportunity.
Image source: Getty Images.
Netflix stock is arguably cheaper than ever
Netflix thrived at the pandemic's onset when billions of folks were forced to entertain themselves at home. Unsurprisingly, demand for streaming content surged, a trend that benefited Netflix tremendously. It added millions of subscribers, revenue surged, and profits expanded.
The favorable industry condition attracted several rivals to enter the fray. As economies are reopening and folks leave their homes more often, demand for in-home entertainment is falling. Meanwhile, Netflix faces increased competition where little existed before the outbreak. It lost 200,000 subscribers in its most recent quarter, ended in March, and it forecasts a loss of 2 million more in the next quarter. With that backdrop, it's not surprising that the stock is 70% off its high.
NFLX PE ratio. Data by YCharts.
Trading at a price-to-earnings ratio of 18.6, Netflix has scarcely been cheaper in the previous five years. Near-term headwinds are not something to ignore, but it's unlikely they justified a stock price crash of 70%. Netflix boasts 222 million streaming subscribers, has grown revenue from $8.8 billion to $29.7 billion in five years, and expanded operating income by roughly $5.8 billion in that time.
While engagement fell at Roblox, the stock's drop is overdone
Like Netflix, Roblox thrived when folks were sent home at the pandemic's onset. The metaverse pioneer is most popular with younger users, so when they were sent home for remote learning, it increased customers, engagement, and revenue.
As kids are returning to school, engagement is falling at Roblox. Average bookings per daily active user fell by 25.5% in April from the same month the year before. Roblox is free to join and use; it makes money by selling premium experiences to players who must first buy a currency called Robux.
Purchases of this currency are recorded as bookings. Decreasing bookings indicate revenue could be next. That could be a stark turnaround for a company growing revenue by over 100% for several quarters since the outbreak. Investors have cause for concern, to be sure.
RBLX price to free cash flow. Data by YCharts.
But not enough to warrant its stock price crash of 75%. Roblox is now trading at a price-to-free-cash-flow ratio of 37, near the lowest since it became a public company.
Growth could be muted in the near term as it digests the impacts of the pandemic, but this is a company that expanded revenue from $325 million to $1.9 billion from 2017 to 2021. The high pessimism is an opportunity for long-term investors to scoop up shares at bargain prices.
