The stock market has experienced some extreme highs and lows over the last two years. The inflation crisis has been particularly rough on growth stocks, widely seen as risky ideas in this economy. Not all of yesteryear's highfliers have recovered from that trouncing in 2023, leaving a few top-notch growth stocks painfully undervalued.
But you know what they say -- buy low and sell high. The market's lingering distaste for growth stocks has created incredible buying opportunities for many genuinely promising high-growth businesses.
On that note, we asked a couple of The Motley Fool's top growth-investing experts to share their most undervalued growth stock ideas in October 2023. Here's what they came up with.
NASDAQ: ROKU
Key Data Points
This growth stock is spring-loaded for big gains
Anders Bylund (Roku): Media-streaming platform provider Roku's (ROKU +2.32%) stock soared in the lockdown phase of the COVID-19 crisis. Many investors saw this stock as a direct play on that home-based entertainment era -- which turned out to be short-lived. So Roku's stock peaked in the summer of 2021, then shifted into a steep drop.
The plunge was amplified by surging inflation and the policy steps taken to fight it. Here, Roku bears saw the formerly inflated stock price as firm evidence that Roku was a risky stock. High interest rates on new debt would surely pose a problem for this company someday, right? So, the price drop accelerated in 2022.
And since most of Roku's revenues come from selling ad space across its streaming platform, the inflation issue brought another gremlin to the party. Why launch ambitious ad campaigns when every household's spending budget is under pressure? So Roku's ad sales slowed down, and this downturn added another weight to the company's stock chart.
Now, these issues won't last forever. As a result, Roku's return from these combined pressures could make you a lot of money over the next few years -- and even more in the long run.
- First, Roku is much more than a coronavirus lockdown stock. The business will grow as long as the global market for streaming media is expanding -- and these are still the early days of that worldwide revolution. And Roku's business continued to grow when the lockdowns ended. The company had 55 million active accounts in the summer of 2021 and 73.5 million two years later -- a 33% increase. That's not too shabby for a supposedly expired growth stock.
- As it turns out, Roku isn't really exposed to interest rate risks. The company paid down its long-term debt balance to zero in the first quarter of 2023. The company is burning some cash in each quarter while the other problems last, but Roku's balance sheet holds $1.8 billion in cash reserves and could finance its operations for several years at the current burn rate.
- The ad market should spring back to life when the inflation mess is behind us. And those ad buyers will have a couple of years' worth of new and improved products and services to promote when their marketing budgets come back. I expect a sudden snap back to generous ad spending, not a slow surge. Sure, that will be a temporary benefit for Roku (and other advertising outlets), but you don't want to miss that market-moving event.
The upswing is already underway. Roku's stock has gained 62% year to date, but that's just the beginning of a much larger opportunity. The stock is down 86% from the soaring peaks of 2021. This situation reminds me of the Qwikster debacle in 2011, when Netflix (NFLX +0.16%) investors didn't see the big picture, and the stock fell as much as 79% in less than a year.
Now, that drop is just another temporary speed bump on a soaring long-term stock chart, and people who bought Netflix stock in those dark days added an extra shot of adrenaline to their gains. That's the playbook Roku is following, and the buying window is wide open right now.
NYSE: RBLX
Key Data Points
Don't underestimate this innovative growth company
Keith Noonan: More than a simple video game, Roblox (RBLX +1.09%) is actually a hosting platform that houses thousands of distinct interactive and social experiences. Users can actually create and monetize their own content on the platform, and this incentive structure results in a continuous stream of new experiences being added to the online virtual world.
Through spending from creators and players on the virtual currency used to buy items and services in Roblox, the company increased revenue by 15% year over year to reach $680.8 million in the second quarter. Notably, the entertainment innovator has just started implementing its plans to generate substantial revenue from digital advertising.
In Q2, Roblox's average daily active users rose 25% year over year to hit 65.5 million. Meanwhile, total engagement hours increased 24% to hit 14 billion. Digital ads revenue is the lifeblood of most social media platforms, and there's a good chance that Roblox can leverage its highly engaged user base to attract and build relationships with advertisers. The company can also benefit from unfolding artificial intelligence (AI) trends.
It's probably fair to say that Roblox isn't commonly thought of as an AI stock. Instead, the company is much more broadly associated with the metaverse trend. This makes sense, given that the software specialist provides an online virtual world that hosts a wide range of games and social experiences.
However, the company has been rolling out AI tools for creators on its platform, and it will be introducing generative AI tools that allow players to easily create content in its world. Down the line, Roblox has the potential to become a go-to platform for using generative AI to make 3D content and experiences.
Trading down 76.5% from its high, Roblox looks like a worthwhile buy for investors seeking growth stocks with explosive potential.
