The U.S. equity market has been quite volatile in the past month. The collapse of SVB Financial's Silicon Valley Bank has triggered fears of a broader contagion. The sell-off in Deutsche Bank's shares also affected investor sentiment. The rising inflationary pressures are forcing central banks across the world to hike interest rates, which is further exerting downward pressure on global equity markets.
While many investors may prefer to avoid investing in the stock market and be on the sidelines now, this may not be a smart move. For the past several decades, we've seen that a period of stock market correction has been followed by a bull rally. Hence, it makes sense to buy shares of high-quality companies trading at a discount now.
Here's why Roku (ROKU 1.82%) and SoFi (SOFI -0.35%) could prove to be star performers in the long run.
1. Roku
Streaming company Roku managed to surpass top-line and bottom-line consensus analysts' expectations in the fourth quarter (ending Dec. 31, 2022). Yet, the company reported a paltry 0.20% year-over-year growth in revenues to $867.1 million in Q4, while its net loss expanded from $242 million in 2021 to $498 million in 2022.
Investors are also worried because 26% of Roku's $1.96 billion cash deposits are with the failed Silicon Valley bank. While the Federal Reserve's intervention to protect SVB's depositors has helped relieve some of the fears of the company's shareholders, the slowdown in ad spending in the current precarious economic environment will continue to affect Roku's near-term performance.
Nevertheless, Roku's long-term prospects look promising thanks to multiple secular tailwinds. Although global advertising growth is expected to stall in 2023, viewers are increasingly shifting from cable or satellite subscriptions for linear TV (cord-cutting) to streaming. The year 2023 is expected to mark the first time non-pay TV households exceed pay TV households in the U.S. Advertiser dollars are following viewership changes, and streaming content players are launching ad-supported tiers (which customers are adopting at a rapid clip).
Roku has been gearing up to capitalize on these opportunities. The company ended fiscal 2022 with 70 million active accounts globally. It also reported 87.4 billion streaming hours in 2022, up 19.4% on a year-over-year basis. The Roku operating system is currently the top television operating system in the U.S., Canada, and Mexico.
Expanding customer base, growing user engagement, broad geographical reach, and strong brand presence will help attract new advertisers, which in turn will boost the top line when the advertising market recovers. Management is also committed to making Roku's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) positive by fiscal 2024.
Roku is currently trading at 2.6 times sales, close to its historically low valuation level and significantly lower than its closest streaming competitor Netflix's price-to-sales multiple of 4.6. With robust growth prospects and significant scope for price-to-sales (P/S) multiple expansion, I believe Roku is an attractive buy now.
2. SoFi
Digital bank and fintech player SoFi surpassed consensus estimates in Q4 (ending Dec. 31, 2022). The company has also guided for adjusted EBITDA above the consensus estimate for 2023.
Thanks to a broad and differentiated portfolio of financial products and services catering to clients' banking, investment, insurance, mortgage, and credit needs, SoFi has been expanding its customer base at a rapid clip. The company added 480,000 new members in Q4, ending the year with 5.2 million customers and $7.3 billion in deposits. Less than 10% of its deposits were uninsured, implying that SoFi is less vulnerable to potential bank runs.
To further attract new depositors, SoFi now provides its checking and savings account members access to $2 million of Federal Deposit Insurance Corporation (FDIC) insurance per account, significantly higher than the usual $250,000 threshold.
SoFi's personal loans business is also thriving, with loan originations rising by 37% year over year to $8.4 billion in fiscal 2022. The company secured a banking license through the acquisition of Golden Pacific Bancorp in February 2022. This has given SoFi access to customer deposits, which are cheaper than alternatives even in the current high-interest-rate environment.
SoFi is also controlling its loan default risk by targeting high-income earners. The company's personal loan borrowers have a weighted average income of $165,000 and a weighted average FICO credit score of 747.
Besides the profitable lending segment, SoFi has also built a comprehensive financial services division and technology platform segment. While financial services have been the biggest hit for the company's bottom line, this business helps acquire new customers to the company's ecosystem -- the starting point for SoFi's successful cross-selling strategy. The company also offers payment processing and cloud banking services to other banks and enterprises, thereby helping it diversify its business and create another sticky client base.
SoFi currently trades at a discount of 47% from its 52-week high. Considering its many competitive advantages and discounted valuation, the stock seems to be a bargain deal now.
