An unstoppable business doesn't mean its stock won't fall. A bear market tends to bring the best of them down with it, but investors should remember that the stock market rises in value far more than it falls.
The S&P 500 index has fallen in only five years out of the last 22. That's why buying shares of strong companies positioned for more growth after a severe market sell-off can pay off big time.
That said, here's why investors should consider buying shares of Roku (ROKU 3.32%) and Nintendo (NTDOY +0.89%) right now.
NASDAQ: ROKU
Key Data Points
Roku
After the stock fell 73% from its previous highs, Roku's future opportunity in the streaming entertainment market is not fully appreciated. The stock is selling at a low level and could be deeply undervalued.
The company doesn't make the bulk of its money from selling those hardware devices you connect to the TV. Instead, most of its revenue comes from selling ads on its platform. Roku is basically an operating system for streaming TVs. Sales of hardware devices generated only 12% of total revenue in the most recent quarter.
Roku's strategy is to grow its active accounts, which is a proxy for the number of households. This number stood at 73.5 million in the second quarter and is growing at double-digit rates.
Once on board, the base of households serves as a magnet to attract big advertising brands. Roku generated $744 million of revenue off its platform last quarter, including advertising and revenue-sharing agreements when a user purchases content or signs up for a streaming service from another provider.
Advertising spending dries up when the economy is weak. That will never change, but this works to the advantage of a long-term investor, since weak revenue performance for Roku's business usually will send the stock down to bargain prices, as it did last year.
With the stock selling well off its previous peak, this is a chance to invest in what could become one of the dominant digital advertising platforms over the next few decades -- a market estimated at $25 billion and growing.
The ad market is already showing signs of turning around. Roku reported an acceleration in revenue growth in the second quarter, improving from 1% in the first quarter to an 11% year-over-year increase in the second quarter.
What's most telling about its position is that it never stopped reporting strong growth in active accounts last year. In the last quarter, active accounts rose 16% to 73.5 million, so it's no surprise to see revenue accelerating. Advertisers will inevitably migrate to where viewers are, and that's increasingly on digital media platforms.
The stock is responding to the improving financial results, climbing 96% so far in 2023. But given its steep discount from previous highs, it's not too late to buy it. The stock has more room to run as Roku reports improving growth and profitability.
OTC: NTDOY
Key Data Points
Nintendo
Nintendo is another undervalued entertainment stock worth buying right now. It is trading well off its previous peak, but Nintendo has been entertaining kids for almost 40 years with its classic video game franchises like Super Mario Bros. and Zelda.
Revenue has taken off recently with strong sales of games and the breakout hit, The Super Mario Bros. Movie, that has brought in over $1.3 billion globally at the box office.
The gaming industry is the largest entertainment market, generating more revenue each year than movies and music. The long-term growth of the industry makes Nintendo an attractive stock to consider, especially with the company rumored to be getting closer to a new console launch as soon as next year.
The Nintendo Switch will go down as one of the all-time classic Nintendo game consoles. It has sold nearly 130 million units since its debut in 2017. After Sony and Microsoft launched their new consoles a few years ago, Nintendo is reportedly set to introduce an upgraded version of the Switch next year.
A new hardware release in 2024 makes sense since a video game console typically has a life span of about seven years. With next year being the seventh since the original Switch release, it is due for a refresh.
Nintendo stock climbed 92% from 2016 through 2019, following the original Switch launch. A new hardware launch is a good reason to consider buying the stock, as it drives a fresh round of hardware upgrades and new game sales, and it's an opportunity to attract new players to the world of Nintendo.
However, the company is doing just fine with a somewhat outdated console system. Sales surged 50% year over year in the fiscal quarter ending in June, driven by strong sales of The Legend of Zelda: Tears of the Kingdom.
Plus, the Mario movie is driving sales of older games in the catalog, with Nintendo reporting sales of 1.67 million units of Mario Kart 8 Deluxe. The game has sold over 55 million copies to date, highlighting once again the popularity of the company's franchises.
Most importantly, the stock looks dirt cheap on top of current sales momentum, not to mention the opportunities over the next several years from new hardware products. It trades at a low price-to-earnings (P/E) ratio of 13.7, a bona fide bargain compared to the average video game stock, which typically sells for a P/E of around 20 or more.
