It's been no secret to market participants that growth stocks have taken a beating. Growth stocks were popular among investors during the initial stages of the pandemic because they also tended to be technology companies that benefited from folks staying home more often. Economic reopening, the Federal Reserve raising interest rates, and a decrease in investors' risk appetite have all contributed to falling prices of growth stocks.
Therefore, if you are looking for growth stocks to buy on the dip, this is a good time to do it. I will suggest Roblox (RBLX 1.61%) and Chegg (CHGG 2.40%). The former is a metaverse pioneer, growing monthly active users even amid the economy's reopening. The latter is an education technology company with a strong moat around the business. Each is down significantly off their highs, allowing investors to buy them at a more reasonable price.
Roblox is adding millions of users
Before the outbreak, in its fourth quarter of 2019, Roblox boasted 19.1 million daily active users. Since then, Roblox has proliferated. As of April of this year, it claimed 53.1 million daily active users. Impressively, growth in this metric has persisted despite the economy's gradual reopening. Roblox operates a platform where users can virtually interact with each other and the environment. The bulk of its users are under 18 years old, so it benefited the most when schools sent kids home for remote learning.
The company runs on an asset-lite model that has helped cash flow from operations expand. The app is free to join and use, but premium items and experiences will cost Robux, an in-game currency that must be purchased with real money. Roblox has third-party developers create these premium products and only pays them a percentage of the revenue the creations earn. That means Roblox pays nothing until their output proves valuable.
This model puts Roblox on a virtuous cycle where increasing users attracts more developers, creates exciting products that attract more users, and so on. Fortunately for Roblox, these cycles are difficult to stop once they get in motion. And fortunately for potential investors looking to buy on the dip, Roblox stock is down 78% off its high.
Chegg's trove of assets provides a moat around its business
Chegg is an education technology company that mainly serves college students. The company offers a subscription to its website that contains valuable learning material for students. In addition to existing content, students can ask 20 questions per month, answered by Chegg's experts. Each question and explanation become available for all other subscribers as well. The policy ensures that Chegg only creates content desired by its subscribers.
Over the years, Chegg has built a massive 79 million-strong content database. Note that college curriculum does not change very much over the years. Therefore, this content can potentially serve future Chegg subscribers for decades. Already, it has helped boost Chegg's revenue from $254 million to $776 million over the last five years and turned operating results from a $41 million loss to a $78 million gain in that time.
As you might imagine, it will be difficult for Chegg's competitors to replicate or encroach on its business. Without the questions from subscribers, it's hard to create the right content. Chegg's existing treasure trove of assets has built a moat protecting its business from poachers.
Like Roblox, investors can buy Chegg on the dip, with its stock down 81% off its highs.