I approach growth stocks with a taste for extreme growth opportunities, seeking out under-the-radar opportunities poised for exceptional growth.
Sometimes, finding the next big thing involves uncovering upstarts before they become household names. Or, you could assess the long-term financial prospects of a company left for dead in a short-lived downturn. Either way, this is how I hope to buy low and sell high (or never sell at all).
I'm on the lookout for the next big success stories, still unnoticed or underestimated by most of Wall Street. As much as I respect the work of top analysts, they tend to miss some of my favorite ideas. And on that note, I have a couple of great growth stocks to share that aren't getting the Street respect they deserve.
Image source: Getty Images.
Roku: From humble Netflix origins to market-building innovator
Let's start with an underappreciated turnaround story. The current Roku (ROKU -10.29%) situation reminds me of the unseen Netflix opportunity in 2011 in many ways.
This company started out as the streaming hardware division of Netflix proper, separated into a stand-alone business so the parent company could strike deals with every consumer electronics maker without the threat of an in-house line of set-top boxes.
Thus, Roku has a head start on pretty much every rival out there. Nobody can match its experience, which Roku earned while polishing the media-streaming interface to a user-friendly gloss. As the streaming market keeps growing globally, with rampant cord-cutting on all five continents, I expect Roku to make the most of this valuable first-mover advantage.
Roku's stock hangs out in Wall Street's bargain bin, even after gaining 130% year to date. Today's stock price is more than 80% below the (admittedly overly optimistic) all-time highs seen in the summer of 2021. The Street's consensus price target for Roku shares stands at $84, which is 10% below the latest price reading of $94.
The company willingly put itself in this position by holding its prices steady through most of the inflation crisis. That choice resulted in deeply negative profits, but also maintained a steady wind in the user-gaining sails. Roku had 56 million active accounts in the fall of 2021, just before the inflation scare started. In this month's report, the number had grown by 34% to 76 million users. Top-line revenue jumped 57% higher over the same period.
Sure, Roku's earnings are still negative. That's a dealbreaker for many investors, including plenty of Wall Street analysts. But I assure you, that situation is as temporary as Netflix's painful Qwikster incident. Roku's free cash flows have already turned positive on a trailing-12-month basis, and that top line is also gaining steam:
ROKU Revenue (TTM) data by YCharts
I'm convinced that we're watching a future entertainment powerhouse going through some growing pains. Whatever your average analyst thinks about Roku's target value, it's a no-brainer buy in my book.
Polestar: Taking the fast lane around bottom-line roadblocks
Next, we're going to Sweden (by way of China and the U.K.) to check out a newer company with a much smaller number of interested analysts. Electric luxury car maker Polestar Automotive (PSNY 0.85%) offers a high-quality alternative to Tesla, backed by parent company Volvo and, ultimately, the Chinese Geely Automobile giant.
Polestar was tapped as Volvo's electric vehicle (EV) division in 2017, rolling the last gas-powered vehicle off its Chinese manufacturing lines in 2022. So this incarnation of the Polestar brand is about a decade younger than Roku and easily overlooked as a minor player in the EV market. Only two analyst firms provide earnings estimates for this stock, and the consensus recommendation by eight firms stands at a lukewarm hold.
The bears got more fodder in November's third-quarter report. The company fell short of its vehicle production and profitability guidance, and reduced its longer-term production goals for 2025. Polestar's market cap stops at $950 million, roughly equal to the amount of cash on hand.
As gloomy as that sounds, there's plenty of spring in Polestar's step. Disappointing or not, revenue grew 41% year over year in the third quarter. Vehicle production increased by 37%, and the next-generation Polestar 4 compact SUV just started its mass-production run.
In my eyes, Polestar is a fast-growing brand with fantastic financial prospects in the long run, and its stock is already priced for the worst-case scenario.
Meanwhile, the company is making heavy investments in sales and marketing, hoping to broaden its reach in key markets, though that push took some cuts in response to the disappointing third-quarter release. Some cost-cutting is in order, even for an operation with high-octane growth ambitions. Its dealer and distribution networks go hand in hand with Volvo's global footprint. And despite the guidance cuts, management still aims for break-even cash-flow results by 2025, followed by rising cash profits in the long run.
Now, I would be less interested in Polestar's stock if it didn't have the backing of Geely and Volvo. If this company runs into serious financial trouble in this early phase of the EV market expansion, Volvo could either contribute some cash or absorb Polestar as a fully owned electric vehicle segment. This is the way of the future, after all, and it would be silly to let the Polestar brand fail.
Many investors wouldn't touch Polestar's stock with a 10-foot pole, and I admit that it's a risky idea even with a solid parent company. Still, the growth prospects outweigh the bottom-line risks for me. Your electric mileage may vary but I recommend starting a small Polestar position at these bottom-shelf share prices.
