With the Federal Reserve now widely expected to boost its benchmark interest rate by another 75 basis points this month, investors' hopes that this bear market might end soon appear to have faded again. As a result of that macroeconomic pessimism, many stocks have lately hit new 52-week lows.
Still, every previous bear market in the U.S. stock market has been followed by a recovery that eventually saw indexes setting new highs, and the current downturn is not likely to be the exception. Eventually, growth tech stocks with promising long-term prospects should rebound in a big way. Here's why three Motley Fool contributors think Roku (ROKU 0.95%), Opendoor Technologies (OPEN -2.22%), and Adobe (ADBE 0.43%) likely fit that description.
Investors could stream massive growth from Roku
Will Healy (Roku): Roku has been one of the more notable victims of the tech sector sell-off. After its stock reached a high of more than $490 per share in July 2021, it began a sharp, steady decline that would take it as low as $62 per share within about a year.
Investors bid down Roku amid a general sell-off in growth tech stocks. But economic headwinds have also led to pessimism about the near-term future of the ad market, which has further weighed on Roku. Those conditions prompted management to forecast revenue growth of just 3% in the third quarter. That's a stark contrast with the company's results earlier in the pandemic: Its top line grew by 57% in 2020 and 56% in 2021.
However, none of this negativity changes the fact that Roku is probably the future of television. Consumers continue to abandon cable TV in favor of streaming.
During Roku's first-quarter earnings call in April, Roku CEO Anthony Wood cited an eMarketer report that just 18% of TV ad spending went to streaming. In Wood's view, that figure should eventually grow to 100%, because, as he asserted at the time, "eventually, all TV and all TV advertising will be streamed." Roku today claims 31% of the connected TV market, according to Conviva, making it the market leader. Its customer numbers reflect this: In Q2, its active account base grew 14% year over year to 63 million.
Moreover, Roku's revenue growth should begin to recover soon. Analysts forecast 13% revenue growth for this year, an indication that they don't expect the 3% growth expected in the current quarter to turn into a trend. They also expect its revenue growth to increase to 17% in 2023. While those results would not be on par with its 2021 levels, they would be a significant improvement from what's expected in Q3.
Finally, thanks to the declining stock price, its price-to-sales ratio has fallen to about 3. At that multiyear low, it trades at approximately the same sales multiple as its primary North American streaming rival, Amazon. At such a discounted valuation, market leader Roku could be the best streaming stock to buy right now.
A digital disrupter in real estate
Justin Pope (Opendoor Technologies): Technology has changed how consumers spend their money. E-commerce has impacted everything from buying food to shopping for clothes and other goods. Yet when it comes to buying a house -- the largest purchase most people ever make -- the processes are still relatively archaic.
Opendoor is trying to change that by giving consumers the ability to buy or sell homes online. Instead of spending time and money to stage and show their homes, and then haggling with potential buyers, people can sell their homes quickly to Opendoor via a process that runs through its website or smartphone app. Opendoor pays cash for the homes it buys, makes repairs as needed, and then resells them on the market.
The company operates on shallow profit margins; it charges a 5% fee when it buys a home. According to the company's website, it's not trying to flip houses for a profit. Instead, it acts like a market maker, buying and selling a ton of homes at around fair market value, and profiting by making its fees on each transaction. Home price appreciation (or depreciation) and the expenses of holding inventory (such as interest on debt) all factor into Opendoor's gross profit margins. Its revenue has grown immensely, but so far, the business isn't profitable.
OPEN Gross Profit Margin data by YCharts
The stock is down by 87% from its high. Indeed, it now carries a market cap of $2.76 billion -- just $250 million more than the cash on its balance sheet. Don't get it twisted: There are risks in Opendoor. The company will now have to prove that it can endure a slower housing market and rising interest rates that are making borrowing more expensive. Still, investors who buy at this point are almost getting the business for nothing.
The market has virtually priced a bankruptcy into the stock at this market cap, which means that the upside could be immense if Opendoor's business model works over the long term. It's a high-risk/high-reward stock, so investors should exercise caution when buying shares (and make them part of a well-diversified portfolio if they do buy them). That said, it's hard to find an investment idea with as much potential upside as Opendoor if things work out.
A once-in-a-decade discount on a digital powerhouse
Jake Lerch (Adobe): With the Nasdaq Composite down more than 25% year to date, many formerly high-flying stocks have fallen on hard times. Adobe is certainly one of them. It's down 34% this year and more than 46% from the peak it hit back in late 2021.
Yet unlike many of the more speculative growth names that took it on the chin this year, Adobe is a long-established public company with significant revenues and profits. Back in June, when Adobe reported its fiscal second-quarter earnings, it beat on the top and bottom lines. For the period, which ended June 3, its revenue came in at $4.4 billion, and it delivered earnings of $3.35 per share. However, shares tumbled after the management lowered its full-year guidance due to the adverse effects of foreign exchange rates.
But foreign exchange rates are no reason to shun Adobe shares. For long-term investors, what should matter is Adobe's place in the digital economy. More than ever, creatives in the fields of marketing, publishing, and education rely on Adobe's products to bring their ideas to life. The company's Creative Cloud subscription bundles sought-after tools such as Illustrator, Photoshop, and Acrobat that are must-haves for many professionals.
For investors, now may be the time to pick up Adobe shares on the cheap. The stock currently trades at a price-to-earnings multiple of 36.5. At first blush, that might seem pricey, but consider that Adobe's 10-year average ratio is a whopping 64.8. And the last time Adobe's price-to-earnings ratio broke below 35 was all the way back in 2013.
ADBE PE Ratio data by YCharts
Adobe reports its fiscal third-quarter earnings next week. Smart investors could use any weakness as a further buying opportunity.
