The stock market has fared well in 2023, but this year's soaring returns followed on the heels of a dismal performance in 2022. In the long haul, many tremendous companies have taken painful cuts to their stock prices.
But their long-term business prospects are no less exciting now than they were before the inflation panic set in. When people talk about buying great stocks on the dip, this is the bargain-bin opportunity they've been looking for.
So we asked a couple of The Motley Fool's tech gurus about their best deep-discount stock deals in this topsy-turvy market. Keith Speights suggested cybersecurity expert SentinelOne (S 2.69%) and Anders Bylund waxed poetic about media-streaming technology specialist Roku (ROKU -0.24%).
Don't worry, we made him put down the rhyming dictionary before explaining what's so great about Roku's deeply discounted stock.
Roku's financial fortress stands tall
Anders Bylund (Roku): The market is really throwing out the market-leading baby with the dirty bathwater here. Roku's software powers 43% of all smart TV sets sold in North America nowadays. No other company can muster a double-digit market share. Next up, the company is taking the lessons learned from this market-defining performance on a world tour. Roku's international expansion is off to a great start in vibrant markets like Germany, the U.K., and Brazil. I realize that one-size-fits-all solutions don't really work for everybody, and a few countries may prefer a different smart media platform in the long run. Still, Roku's global addressable market is measured in billions of households in the long run.
In the meantime, investors lost patience with Roku's stock two years ago. Digital advertising accounts for a significant chunk of the company's incoming revenues, and that market ran into a global downturn in 2021. As a result, Roku's stock trades 83% below its all-time high right now.
This giant mismatch between terrific business prospects and bargain-bin stock prices is quite surprising. The stock trades at 3.4 times trailing sales, 4.3 times Roku's book value, and 6.3 times the company's cash reserves. All of these metrics place Roku in the value-investing corner of Wall Street.
And the advertising slowdown is showing signs of brighter days again. Roku's top-line sales growth took a breather in the fall of 2022 and spring of 2023 but came back to life in the recent second-quarter update:
ROKU Revenue (TTM) data by YCharts
And did I mention Roku's robust cash reserves? I think I did, but let's go back to that brilliant resource. The company leans back on a cash pile worth $1.7 billion, and Roku's balance sheet holds zero long-term debt. Nil. Nada. Zilch. This company is well-equipped to weather even a long and painful storm -- but the cloudy skies are already clearing up.
Long story short, Roku is a future media giant whose stock has fallen on hard times recently. This has been my favorite stock to buy for nearly two years now, and it's still a tremendous bargain today.
This beaten-down growth stock has big upside
Keith Noonan (SentinelOne): SentinelOne has seen volatile trading since its initial public offering (IPO) back in June 2021. The cybersecurity specialist's share price rocketed out of the gate and saw strong gains in subsequent months as excitement for growth stocks shaped the market.
But as macroeconomic pressures took hold and the company's revenue growth slowed, momentum for the stock faded. Today, the stock trades down roughly 78% from the pricing high that it reached in November 2021.
SentinelOne provides a cybersecurity platform that uses artificial intelligence to protect hardware devices, cloud networks, and data containers from attacks. While the company's rate of sales growth has decelerated in recent quarters, it still managed to increase revenue by 46% year over year to reach $149.4 million in the second quarter. Even with many businesses pulling back on growth initiatives due to economic uncertainty on the horizon, SentinelOne has continued to grow its sales and customer count at healthy clips.
The cybersecurity specialist closed out the quarter with over 11,000 customers, representing an increase of 30% year over year, and the business continued to see encouraging customer trends along other lines. The total number of clients generating over $100,000 in annualized recurring revenue grew 37% to reach 994, and customers using the company's platform once again increased their spending by more than 15% on average.
SentinelOne's non-GAAP (adjusted) gross margins are also seeing significant improvement. In Q2, the company's adjusted gross margin jumped to 77% -- up from 72% in the prior year period. For the full year, management is targeting an adjusted gross margin of 76%, expanding from 72% last year.
While the company is still operating at a loss, it ended last quarter with roughly $1.1 billion in cash and equivalents. Based on its current rate of cash burn, the balance sheet can support the business through the next three years without the need to take on debt or sell new shares. With margins heading in the right direction and sales still expanding at a rapid clip, this beaten-down growth stock looks like a worthwhile play for risk-tolerant investors.
