Stock prices often drop for no good reason. Volatility in the wider market can create double-digit declines in a share price, even though the business in question has had no change in its earnings power.
Sharp declines are a different story. When a stock falls by 50% or more, Wall Street often has good reasons to feel pessimistic about the business. These slumps often occur due to the combination of unrealistically high expectations and a big impairment in the companies' growth and earnings prospects.
With that caution in mind, let's look at a few stocks that took tremendous hits from their pandemic highs but are showing signs of a rebound. Read on for some good reasons to like Roku (ROKU -10.29%) and Zoom (ZM 1.57%) stocks right now.
Roku has viewers
Roku shares are down just over 50% since September 2020, back near the peak of pandemic-fueled growth for digital entertainment. Sales growth has slowed significantly since then. Revenue was up 58% in 2020 and rose just 13% in fiscal 2022, and profits have turned to net losses, as well.
Yet Roku's best days could be ahead of it. The streaming-video specialist has been steadily growing its influence in the industry, gaining 2 million new viewers last quarter to push its global base to 74 million. Streaming hours were up 4.4 billion year over year, to cross 25 billion. The company's flagship Roku channel cracked into the Nielsen streaming ratings, too, and attracted over 1% of total U.S. TV viewing in May .
The missing piece to this rebound story is profits. Roku is still generating losses, mainly because of a cyclical downturn in the digital advertising market that's making it hard to monetize its growing user base. Downturns don't last forever, though, and investors who buy this stock before the rebound is clear could see some excellent returns from here.
Zoom is shifting focus
Zoom shares have dropped over 80% since the days when it was a household name during the pandemic. Annual sales gains are no longer in the multiples of 100% but, instead, landed at just 3% in the most recent quarter. Profitability isn't sitting above 20% of sales, either, but closer to 2% of sales right now.
ZM Operating Margin (TTM) data by YCharts.
Yet Zoom has held on to most of the fantastic market-share gains it captured through the pandemic. Annual sales are on track to hit $4.4 billion in 2023, compared to below $1 billion in 2019. And its enterprise segment seems to have a bright future ahead.
That division boosted sales by 13% this past quarter. Companies renewed their digital communications contracts at increasingly large annual commitments, with average renewed contracts reaching 112% of the prior level.
Zoom's path back into Wall Street's good graces involves continued success with these enterprise clients, thanks to a growing portfolio of services. The company has already demonstrated success in this arena, for example, with its popular Zoom phone and team-chat services.
While the risks have increased around a profit margin rebound, investors are being given an attractive discount in exchange. You can buy Zoom stock for less than 5x sales today, compared to a price-to-sales ratio (P/S) of over 120 at its peak.
To be clear, Zoom and Roku aren't likely to set new earnings records anytime soon. And the stocks' valuations have understandably shrunk, along with those weaker profit prospects. But investing is all about the future, and that seems bright for both of these growth stocks, which are turning their businesses around today.
