Growth stocks have taken a beating in 2022, but they will not remain out of favor indefinitely. It might be an excellent time for long-term investors to add growth stocks to their portfolios now that they are beaten down and selling for bargain prices.
Roblox (RBLX 1.60%) and DraftKings (DKNG 0.59%) are two growth stocks investors should consider adding to their portfolios before a big rally pushes them higher.
Roblox is popular with the younger generation
Roblox is a pioneer of the metaverse, where users can virtually interact with each other and the environment. Unsurprisingly, it thrived during the pandemic when millions of kids were sent home for remote learning. Roblox's most popular cohort of users is school-aged children. Parents felt more comfortable letting their kids play with their friends in the metaverse than in person.
Daily active users surged from 19.1 million before the outbreak to 43.2 million in the second quarter of 2021. Impressively, Roblox has kept the users it attracted during the pandemic. Its most recent update noted that it had 50.4 million daily active users in May. The company's platform is free to join and use for the most part. Roblox makes money by selling an in-game currency required for premium experiences.
From 2018 to 2021, revenue has exploded from $325 million to $1.9 billion. Roblox is not yet profitable on the bottom line but is generating healthy cash flow from operations. The asset-lite business model helps with that cause. Roblox outsources the creation of premium experiences on the platform to third-party developers and pays them a percentage of their creations' revenue. In that way, Roblox only pays for features that are popular with players.
RBLX Price to Free Cash Flow data by YCharts
Roblox faces near-term headwinds as the economic reopening creates competition for people's leisure time. That, combined with the broader market sell-off, has Roblox trading at an inexpensive price-to-free-cash-flow multiple of 44.
DraftKings is in expansion mode
DraftKings is an online gambling company expanding across the U.S. It offers players the chance to wager on sports and traditional casino-style games like blackjack. DraftKings is available in 17 states for sports betting and five for iGaming. States are becoming receptive to internet gaming as a new source of tax revenue.
DraftKings benefits from this trend; its revenue has soared from $192 million in 2017 to $1.3 billion in 2021. It is reasonable to expect DraftKings will gain access to more states over the next several years. From the consumer's perspective, DraftKings offers convenience. Instead of driving hours to your local brick-and-mortar casino, you can instantly place a wager from a mobile device. That could explain why revenue has exploded as quickly as it has.
DKNG PS Ratio data by YCharts
Like Roblox, DraftKings is not yet profitable on the bottom line as it makes significant investments in player recruitment with each new state it enters. Because of the lack of profits and the broader market sell-off, DraftKings is selling at a price-to-sales multiple of 3.7, near the lowest in the last five years.
Roblox and DraftKings are growth stocks with excellent potential that are selling at bargain prices. Investors would be wise to consider adding them to their portfolios before a big rally sends them higher.
