With the year wrapping up and the holiday season upon us, some investors might be looking for a little holiday cheer after a challenging year for the stock market. With many growth stocks trading far from their peaks, that cheer might come from the significant opportunities for bold long-term investors in 2023 and beyond.
Not every stock that collapsed in 2022 will rebound to its former high, but strong fundamentals should offer some solid clues about where to look. As 2022 wraps up, three Fool contributors put their heads together to point you in the right direction. Roku (ROKU -0.40%), DigitalOcean Holdings (DOCN -0.54%), and Roblox (RBLX -0.74%) all show solid signs of a potential rebound. Here's what you need to know about these three stocks to buy in a bear market.
This streaming giant is still growing where it counts
Justin Pope (Roku): Roku gained some attention over the past few years as the era of streaming got underway. It used to be known for selling devices that allowed TVs access to streaming services. But the streaming platform now gets more attention for its streaming services than its devices. The stock was popular during COVID-19 as streaming came into its own, but it got crushed during this bear market as pandemic worries eased. Shares are down a whopping 88% from their high, leaving investors wondering if Roku is a bust as a stock.
ROKU Revenue (TTM) data by YCharts
Granted, things haven't been exactly peachy for the company in recent months. Revenue growth has slowed dramatically. The chart above shows how much growth has slowed this year. But there's much more to this story.
Roku sells ads to its users, and brands have been pulling back on ad spending since the summertime over concerns about a potential recession. It's something being felt across the industry and isn't isolated to Roku. Roku is still picking up new users at a healthy clip -- they increased 16% year over year to 65.4 million in the third quarter.
Advertising is a cyclical business, and revenue growth should pick back up once advertising recovers. What matters is that Roku's user base (its advertising audience) keeps growing each quarter.
In the meantime, Roku's financials are rock solid and it can wait out the storm. The company has $2 billion in cash on its balance sheet against just $82 million in long-term debt. The business burned only $30 million in cash in Q3 despite the company's struggles. In other words, Roku's existing cash can fund the business for the foreseeable future, so investors shouldn't worry about the company needing to raise money in the middle of a recession.
Roku's huge stock price decline could become a great opportunity if it keeps picking up new users, and that's showing no signs of slowing down.
The metaverse is the future -- but it might be more childish than you expect
Jake Lerch (Roblox): When investors hear someone talking about "that metaverse company," their first thoughts probably go to Meta Platforms. But to me, the company that's got the metaverse right is Roblox.
This year has been rough for both Meta Platforms and Roblox. Meta shares are down roughly 67%; Roblox shares are down 69%. Yet, I think Roblox stock is a buy, while Meta is not.
Both companies are working to develop the metaverse, but to very different ends. Meta has spent more than $36 billion constructing its version of the metaverse. Yet, the reviews on what its produced so far are not good. Personal avatars lack legs, the graphics are underwhelming, and Meta's virtual reality headset is both uncomfortable and expensive. Meanwhile, Roblox's version of a metaverse is thriving. It has over 58 million daily average users (DAUs), with over 13.4 billion hours engaged over the three months ending on Sept. 30.
Granted, Roblox's metaverse is a more modest concept. There's no headset and the target demographic is kids (not office workers). But Roblox's concept works now and might be the only one that ever works. It remains to be seen if adults will ever embrace the metaverse. Ultimately, it might end up being a playground -- a place grown-ups visit, but only in the company of their kids or grandkids.
Another reason why I like Roblox so much is that its stock price has something of a floor. Its current market cap is only $20 billion. That price might attract attention from other tech companies with cash on their balance sheets and a desire to make an acquisition.
Even without an acquisition, Roblox has a future. Its DAUs and hours engaged attest to that. The real question is whether the company can continue to grow -- which I believe it can and will do. That's why I think it's a growth stock worth buying hand over fist.
The company bringing about a sea change in the small business cloud
Will Healy (DigitalOcean): DigitalOcean provides cloud infrastructure services to small and medium-sized businesses (SMBs), making it a direct peer of companies offering cloud services such as Amazon and Microsoft. Considering DigitalOcean's market cap of just over $2.5 billion, one might wonder how it competes with such tech giants.
However, the DigitalOcean community offers resources such as online tutorials and the ability to consult other DigitalOcean clients to solve issues. This benefit is critical, since SMBs often have only one IT worker -- if they can afford to hire an IT professional at all. That also strengthens the company's competitive advantage, since its peers cannot quickly and profitably replicate such a network.
Moreover, DigitalOcean stands out by offering "simple, predictable pricing" that caters to SMBs. It posts pricing on its website, and clients can adjust service levels according to their needs. Although the number of its customers spending over $50 per month grew 50% year over year, most clients spend less than that.
Even with that low-revenue client base, DigitalOcean's Q3 revenue of $152 million increased by 37% year over year. It also reported net dollar retention was 118%, meaning the average client spent 18% more on services than in the prior year. Such revenue growth puts DigitalOcean on track for approximately $575 million in revenue for 2022 and positions it to meet its goal of $1 billion in revenue by 2024.
But even this strong growth did not stop DigitalOcean stock from falling by nearly 80% over the last year. Inflation and economic sluggishness have hit SMBs hard, and as a money-losing company in a bear market, interest in the stock fell.
In the second-quarter earnings report, it inexplicably stopped publishing total customer numbers. That could mean it has lost customers over the last two quarters. The company reported having 623,000 customers at the end of the first quarter.
Still, prospective buyers may like the fact that the price-to-sales (P/S) ratio of 5 is close to record lows. The possible struggles with customer growth could also prove temporary. As more SMBs turn to the cloud, the benefits should eventually accrue to DigitalOcean stock.
