The stock market has given investors a wild ride over the past two years. After many stocks reached new highs in 2021, rising interest rates and outsized inflation raised fears of a recession (that has yet to happen), pushing the market lower.
Meanwhile, some growth stocks are already on the rebound but still trading well off their previous highs. Let's see why three Motley Fool contributors believe now is a good time to buy shares of Amazon (AMZN -2.56%), Roku (ROKU -3.05%), and Home Depot (HD 0.74%). These three great stocks should soar in an eventual bull market.
Buy Amazon before e-commerce recovers
John Ballard (Amazon): Shares of Amazon are down 36% from their all-time high a few years ago. The e-commerce leader has waded through murky waters over the last year. Inflation and slowing e-commerce spending pushed Amazon's revenue growth to the single digits, which is far off the double-digit annual growth investors got used to over the last decade.
Entering 2023, Amazon's cloud services business also started to show decelerating growth, as businesses pull back on spending ahead of uncertainty in the broader economy. But this means Amazon is certainly capable of growing much faster in a healthier economy.
Amazon's online stores reported flat year-over-year growth in the first quarter. But given the advantages Amazon has in offering Prime benefits and competitive prices on Earth's biggest selection, it's a good bet that Amazon's e-commerce business will definitely grow faster than 0% when the economy is stronger.
Moreover, Amazon has developed explosive new revenue streams in recent years from advertising and third-party fulfillment services. Both segments reported revenue growth of at least 20% year over year in the first quarter.
Investors should also watch for the new wave of demand in artificial intelligence (AI) services to spark an acceleration in revenue growth in Amazon Web Services, where the e-commerce leader is leading the burgeoning cloud services market.
All these opportunities spell several ways for Amazon to deliver returns for long-term investors. The stock has already climbed 43% since the start of the year, so investors interested in Amazon shouldn't wait too long to pull the trigger. It's still trading at a multiyear-low valuation, signaling the stock is undervalued.
Buy now and reap the rewards in a bull market
Jennifer Saibil (Roku): Since you can't time the market, and there's no way to know when it will bounce back, it makes sense to buy stocks with long-term potential now. In fact, contrary to naysayer predictions that the stock market won't make significant upward progress while the economy is still pressured, many stock prices are already exploding so far in 2023. The broader market is climbing, illustrated by the S&P 500's 10% year-to-date gain, its highest so far this year.
That's an introduction to why I think it's a brilliant idea to buy Roku stock right now. Roku stock has been knocked down hard as growth dries up after skyrocketing for a long time. The current woes stem from advertisers cutting their budgets, and that's not likely to shape up in the near term. But the long-term story looks compelling, which makes the current price look like a great deal so long as you have a long time horizon.
Roku has two parts to its business: the hardware or player segment and the ad or platform business. Having two separate but complementary parts is already a quality I find attractive in a business. The hardware business, which includes sales of its streaming devices, post low growth and then declining sales in recent years as supply chain backups and inflation affect prices and spending. But hardware sales were up 18% year over year in the 2023 first quarter, just as the ad business started flagging. Roku is the industry leader in streaming devices with 43% of the market as of the end of the first quarter, its biggest lead yet.
Its other, bigger, business is the platform business, which is mostly ad sales. It typically accounts for around 85% of overall sales. For several quarters leading up to the 2023 first quarter, it also accounted for all of the gross profit. However, platform revenue declined 1% year over year in the first quarter. This is likely to continue as long as the economy remains uncertain. But as advertisers continue to go where the viewers are going, which is to streaming sites, Roku is well positioned to grow when the economy improves.
Roku stock is down 88% from its all-time high but up 42% in 2023. Shares are trading at the low price-to-sales ratio of 2.6, and Roku stock should soar in a bull market.
A housing recovery is coming
Jeremy Bowman (Home Depot): Much like the housing market, Home Depot thrived during the pandemic as stay-at-home orders and social distancing led Americans to spend more money on their homes, building decks, adding a fresh coat of paint, or buying a new refrigerator.
However, as the economy has slowed down, so has the housing market, and that includes both sales prices and the rate of turnover, which is down substantially from the blistering pace during the pandemic. Consequently, Home Depot stock is down nearly 31% from its peak in late 2021, and its recent results show the challenges the company faces in the current economy.
Comparable sales in the quarter fell 4.5% and overall revenue declined 4.2% to $37.3 billion. Earnings per share (EPS), meanwhile, slipped from $4.09 to $3.82 as margins compressed, and the company slashed its guidance for the year. It now expects revenue and comparable sales to fall 2% to 5% and sees an EPS decline of 7% and 13%.
The company is clearly struggling with difficult comparisons and a challenging housing market, but there's little doubt that Home Depot's long-term competitive advantages are intact.
The retailer is the leader in a home improvement retail duopoly with Lowe's, and its economies of scale, national footprint, and relationships with home improvement professionals make it difficult for smaller chains to compete in areas like price.
Meanwhile, the home improvement market in the U.S. still has a lot of growth left, especially as some estimates say that there is a housing shortage of as many as 4 million homes in the country.
The housing market headwinds will eventually reverse and become tailwinds. When they do, Home Depot is well positioned to be a winner and the stock should soar to new heights in the housing recovery.
