Buying shares of growing companies after they have fallen sharply can be a rewarding investment strategy, but it's important to understand the key factors that will allow a business to make a comeback.

Roblox (RBLX 1.35%), RH (RH 2.28%), and Roku (ROKU -10.29%) are all trading well off their highs, but three Motley Fool contributors believe these fallen growth stocks are ripe for the picking.

65 million users and growing

John Ballard (Roblox): Roblox is one of the most popular online entertainment platforms for kids and teenagers. The company's quarterly revenue, which is generated from advertising, premium subscriptions, and purchases of user-generated content and its in-game currency, nearly tripled over the last three years, but that didn't keep the stock from falling by 80% from its peak.

The culprit appears to be weak profitability. The company reported a loss of $282 million on $680 million of revenue in the second quarter. But there are a few reasons to believe it should be able to turn things around.

Roblox has a growing base of daily active users (DAUs). The company ended the second quarter with 65.5 million DAUs, up 25% compared to a year earlier. Spending on content slowed in 2022 amid high inflation, but Roblox's audience is starting to spend more money again, and revenue was up 15% year over year in the quarter. There's not a better antidote for poor profitability than a growing top line.

Another reason to like the company's prospects is that Roblox has a geographically diversified user base. In fact, the platform's fastest growth is coming from overseas markets such as the Asia-Pacific region, where its revenue grew 30% year over year last quarter. 

Roblox's lack of profits is a negative, but if you are investing with a long-term time frame, this stock could be a huge winner for you over the next decade. The business has a long runway for growth. All investors need to do is look at the increase in the employee count recently.

In Q2, Roblox increased its headcount by 26% year over year, from 1,900 employees to approximately 2,400. That speaks to the opportunities management sees just ahead in an environment where many other tech companies have been laying off employees. This is a company with more momentum behind the scenes than the market is giving it credit for.

Still a long-term winner

Jeremy Bowman (RH): It only takes a look at RH's latest earnings report to know that things aren't great now for the upscale retailer. Revenue and profits are falling, and CEO Gary Friedman readily admits that the slowing housing market and higher mortgage rates have presented challenges for the luxury home furnishings company, which was formerly known as Restoration Hardware.

However, despite the near-term challenges in the home furnishings industry, RH still seems well-positioned to benefit from a number of long-term trends. Those include:

  • A significant housing shortage in the U.S., estimated at 4 million homes. That gap will have to be narrowed, and homebuilders are already working on it. As it closes, those new homes will need new furniture, supporting demand for RH's products.
  • American homes are getting bigger due to consumer preferences and trends like remote work, which has also boosted interest in second homes. Bigger homes and more homes mean more demand for furniture.
  • The Federal Reserve expects that it will bring the federal funds rate down to around 2.5% to 3% in the next two to three years. The decline in market interest rates that are influenced by the benchmark should help support a recovery in the housing market, providing a boon to RH.

In addition to those broader tailwinds, the company is expanding into Europe. It recently attracted significant press coverage for the opening of its first gallery in the U.K., and it's expanding the brand beyond home furnishings, opening a restaurant and a hotel, leasing planes and yachts, and launching a streaming service focused on architecture and design. Those moves should help it tap into brand loyalists cultivated through RH's membership program, growing the business beyond the home.

Friedman is a visionary in the industry, and his bold thinking has produced huge returns for dip-buyers in the past. In 2016, the stock plunged after Friedman pivoted the company to a membership model, but the stock surged in 2017 and 2018 as that decision paid off for the business. This sell-off, with the stock down 57% from its 2021 peak, could offer a similar opportunity.

Focus on the future

Jennifer Saibil (Roku): Roku was one of the biggest winners of the early pandemic bull market, and then it was one of the biggest losers in the period that followed. It's now 83% off its 2021 high, even though it's up 95% this year.

Roku stock is climbing back up as investors recognize its potential. It's gaining customers and generating higher revenue, and as people continue to increase the share of their viewing time spent with streaming services, it's uniquely positioned to benefit due to its popular operating system and free streaming model.

In the second quarter, revenue increased 11% year over year, with strength in both device and platform revenue. Active accounts increased by 16% over last year and by 1.9 million sequentially to 73.5 million, and streaming hours increased 21% over last year.

Roku's platform revenue, which mostly comes from ads, accounted for almost 90% of the top line, and this is where its greatest opportunities lie. As viewers continue to move to streaming, advertisers are moving over their dollars as well. This segment has suffered as advertisers cut their budgets in the high-inflation environment when they feared a recession was coming, but that presents a massive growth catalyst when they reopen their wallets.

The Roku Channel -- the company's flagship free ad-supported streaming service -- accounted for 1.1% of total streaming hours in the U.S. in July, according to Nielson, and as it adds more accounts and hours, it should capture more ad dollars.

In the meantime, profits are under pressure. Roku is back to booking net losses after briefly becoming profitable in 2021 when sales soared, and that situation is not expected to reverse in the near future. But it should change as well when Roku is generating higher sales. This won't happen overnight, but if you can focus on the long term, Roku could be an excellent addition to your portfolio.

Roku stock currently trades at about 3.5 times trailing 12-month sales, which is a bargain when you consider its opportunity. Now's a great time to buy as it makes its way back up.