On average, the stock market tends to deliver some of its worst performance during the summer months. Even though that seasonal trend may hold true in general, not every company is going to feel the summer doldrums. Indeed, it might even be possible to find some hot stocks with real potential to buck those trends and deliver strong business-driven returns for their shareholders.
With that potential in mind, three Motley Fool contributors went looking for hot stocks to help you get your portfolio ready for summer. They found Roblox (RBLX -0.59%), SoFi Technologies (SOFI -0.28%), and Upstart (UPST -1.97%). Read on to find out why they selected those companies, and decide for yourself if one or more of them is bringing the heat you'd like to see in your own portfolio this summer.
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Get some game!
Eric Volkman (Roblox): Young kids can hardly get enough Roblox, and guess which demographic is about to go on summer vacation?
Roblox is the online video gaming platform for the school-age crowd, which forms a wide and solid user base from which to grow. Happily, management is doing a fine job not only of keeping these users engaged, but also effectively and patiently laying the groundwork for future success.
The company's bookings rose a beefy 23% year over year in its most recently reported quarter to almost $774 million. It's no coincidence that the count of average daily active users rose at a very similar rate. Ditto for total hours engaged, which reached a hard-to-imagine 14.5 billion.
Typical for a young(ish) tech stock, despite those double-digit growth figures, Roblox isn't yet a winner on the bottom line. In the aforementioned quarter it booked quite a steep loss of over $269 million, far wider than the $162 million in the same period of 2022.
But a closer look at the profit and loss statement teases out the key culprit. Of the five expense categories, the largest (at over $275 million) was research and development, the outlay for which was a serious 55% higher year over year.
Roblox is devoting capital and employee brainpower toward optimizing its games and drawing in even more users, in other words. There are plenty of devices, games and websites competing for kid attention these days, so it's smart of management to be very assertive in this area.
This is occurring as Roblox remains in the investor doghouse. For obvious reasons it showed great leaps in operating and financial metrics in the thick of the coronavirus pandemic; these have come down to earth now that kids can actually leave their homes.
That period skewed the company's results in its favor, and as with other assets the market is adjusting to present reality. But this has left the stock relatively cheap in terms of price and valuations. And with the vast potential the company has as a top gaming site, it has made it quite a bargain.
A bank-tech stock that's on fire
Jason Hall (SoFi Technologies): Skyrocketing interest rates have shaken consumers and put lenders on notice. Fears of a federal government shutdown, and that the U.S. could actually default on its debts, have never been higher. Consumers keep getting squeezed by inflation. Worries of recession loom.
Add it all up, and money-losing SoFi sounds like a stock to avoid, right? Not so fast.
As much as it may seem like SoFi is at risk of a deep freeze -- its stock is down this year, especially hard-hit after the failure of several U.S. banks -- the business is hot. A combination fintech and bank, SoFi continues to bank big growth, and across nearly every segment of its business. Member and product growth was 46% in the first quarter, as more people signed up for its lending (15% growth) and financial services (up 51%) products.
And that growth is quickly adding up on the bottom line. SoFi continues to report a loss under generally accepted accounting principles (GAAP), but the combination of 43% revenue growth and a far more modest 15% increase in operating expenses caused its loss to fall by 70%. As a result of continued fast growth and a steady hand on expenses, management expects to be profitable by the fourth quarter.
The foundation is being laid, and those investments are beginning to pay off. Now looks like an excellent time to buy SoFi, just as its profit-making engine gets fully warmed up.
The big pressure affecting this company looks like may be easing
Chuck Saletta (Upstart): Upstart seeks to help lenders better identify good credit risks, particularly among those who receive poor scores from other consumer credit ratings agencies. That business can potentially be an incredibly lucrative one, as borrowers who pay their bills but can't get financing elsewhere are more likely to deliver reliable cash flows to their lenders.
Upstart uses a proprietary artificial intelligence (AI) model to try to identify those borrowers. While AI can detect opportunities that more traditional underwriting models miss, it generally has a massive blind spot. It can only ever be as good as the data its trained on. If the available data from the past is radically different than what's expected in the future, then its models can provide answers that wind up being very wrong.
When it started and rapidly expanded, Upstart benefited from a low interest rate economy that was more or less consistently growing. As 2022 hit, interest rates rose, the stock market dropped, and recession fears soared, lenders got spooked by the risk that Upstart's model could potentially underperform in a rougher economy.
That forced it to take more loans on to its own balance sheet instead of passing them on to other financers. While holding loans helped it continue to gather data and adjust its model due to changing circumstances, it was not the asset-light business model its early investors signed up for. That caused its shares to tumble -- hard.
Yet now the Federal Reserve has indicated that interest rates may not rise much from here, and Upstart is showing signs of life at adapting its model to the current reality. That has helped Upstart get renewed interest in partnering from lenders, which in turn has helped the confidence of Upstart's own investors.
As a result of that restored confidence, the stock has been on fire recently -- just about doubling calendar year to date. While its future is still yet to be written, the signs of renewed life that Upstart has shown certainly gives investors hope that its AI-driven underwriting model can in fact thrive.
Summer's (unofficially) here -- are you ready for it?
Memorial Day weekend generally marks the unofficial start of summer. Now that it's here, it's a great time to take a look around for investments that look capable of beating the summer doldrums. Roblox, SoFi Technologies, and Upstart each offer decent reasons to believe they could have what it takes to buck the trend of this time of year being tough for investments. That makes today a great time to consider whether one of them may be worth adding to your investments for your own future.
