The stock market was unkind to my portfolio in 2022. Most of my stocks saw dramatic price reductions as investors backed away from growth stocks and other risky asset classes.
As a result, many of the companies in my investment accounts strike me as ridiculously cheap nowadays. I'll show you how I think about this situation with Roku (ROKU +3.84%) as an example.
But that's not all. I also own a few robust business giants that don't fit the classic growth stock mold. Some of my favorite companies in that category are going through unusual changes, and market makers are not comfortable with unexpected changes. From this group, I'll walk you through my thinking on Amazon(AMZN +0.26%).
NASDAQ: ROKU
Key Data Points
Roku: Not as risky as it seems
If you'd invested $1,000 in media-streaming technology expert Roku a year ago, that position would be worth just $242 today.
Roku investors worry about slowing growth in the streaming media sector. Furthermore, Roku collects some of its revenue from digital advertising. Ad buyers have reduced their marketing budgets in an environment of uncertain consumer demand and inflation-boosted operating costs. Roku also faces the same rising costs, but has chosen to absorb them rather than passing the buck to its customers -- namely, consumers and smart TV makers.
So Roku's top-line growth has indeed slowed to its lowest rate ever, clocking in at 12% year over year in November's third-quarter report. Earnings and free cash flows are also in the red and heading lower. The sky is falling!
Not so fast. Roku is in no financial danger, and it should be able to ride out even a prolonged economic crisis.
The company consumed $129 million of free cash flow over the last four quarters. But take a look at the balance sheet. Roku sits on a cash cushion of $2 billion with no long-term debt to speak of. The lights will stay on for years, even if the cash burn speeds up. And if Roku ever faces a real cash crunch, the company should be able to raise additional cash from debt papers or stock sales.
Long story short, Roku is equipped to handle a few tough years and come roaring back when the market turmoil quiets down. As a service-agnostic provider of high-quality user experiences, Roku should grow as long as the concept of digital media streams is racing ahead. We are years away from streamers cutting the last cable TV cord, or even getting close to the traditional TV market's level of viewer engagement.
So I don't mind holding Roku stock through these rough waters, all while adding more shares to my position at downright fantastic prices.
NASDAQ: AMZN
Key Data Points
Amazon: The supersized growth story isn't over
Let's break down what's been going on with Amazon. In short, the past five years have been pretty sweet for the company.
It saw some major growth in both its retail and cloud businesses, thanks in part to the pandemic driving people to shop online and use cloud services. However, the party may be slowing down a bit.
Analysts predict that Amazon's revenue will rise only about 8.6% in 2022 and 10.1% in 2023. Its e-commerce and cloud businesses are facing some near-term challenges, such as supply chain problems and increasing competition. Moreover, Amazon may have scaled up its business operations too quickly during the boom of the early coronavirus lockdowns, forcing the company to roll back its payroll and slow down future expansion plans during a period of weaker demand.
That being said, Amazon is no stranger to economic downturns and it's expected to return to profitability in 2023 and continue growing in the following years. While there are always risks in the market, Amazon's track record and dominant position in the e-commerce and cloud spaces make it a strong contender for the long haul.
And Amazon founder Jeff Bezos, now steering the ship as executive chairman of the board, still runs the company like a hungry little start-up. Every annual report still includes a copy of the first letter to shareholders, vintage 1997, featuring this famous quote: "But this is Day 1 for the Internet and, if we execute well, for Amazon.com."
That's still the mentality, and current CEO Andy Jassy also supports that vision. In last year's annual report, he outlined the opportunity for future growth this way:
Amazon is a big company with some large businesses, but it's still early days for us. We will continue to be insurgent -- inventing in businesses that we're in, in new businesses that we've yet to launch, and in new ideas that we haven't even imagined yet. It remains Day 1.
This stock has lost about half of its value from the all-time highs of 2021. Again, I don't mind holding and accumulating shares of a top-quality business while investors are nitpicking the company's temporary challenges. Amazon looks like a no-brainer buy in this market.
