Buying top growth stocks while they are down can be a rewarding investment strategy. If a company is growing, investors can be confident the stock will eventually follow that progress.
If you have an extra $1,000 sitting around in cash, three Motley Fool contributors believe Toast (TOST 3.42%), Roku (ROKU -10.29%), and MercadoLibre (MELI 3.09%) have the makings of long-term winners. Here's why you might consider adding these promising candidates to your portfolio this month.
Undervalued growth
John Ballard (Toast): As Shopify has proven in recent years, there is a massive growth opportunity in supplying cloud-based software to help businesses stay competitive in a digitized economy. Toast is following in Shopify's footsteps, providing an industry-specific platform for restaurants, and its recent growth suggests the stock could be a long-term winner.
Toast reported another strong quarter earlier in November, with revenue up 37% year over year. That is a lower rate of growth than a year ago, and it's why the stock has fallen this year. But with the stock trading at 2 times trailing revenue, Wall Street might be undervaluing its shares. For perspective, Shopify stock has never traded below a price-to-sales ratio of 6.2, while Toast is growing faster.
One reason investors are placing a low valuation on Toast is weak profitability. But the company is clearly on a path to getting there as gross profit increased by 50% year over year last quarter, faster than the rate of revenue. This translated to a narrower net loss on the bottom line compared to the year-ago quarter.
While the company's guidance might have also contributed to the stock's recent pullback -- revenue is expected to grow 32% year over year at the midpoint of the revenue guidance range -- Toast is serving a huge industry with over $900 billion in annual revenue. The company continues to sign up thousands of new locations each quarter. The long runway of growth ahead and relatively low valuation make shares an attractive buy right now.
The unsung hero of streaming
Jennifer Saibil (Roku): The streaming industry continues to dazzle investors as it captures greater market share, changing the way viewers consume content for good. But beyond the usual streaming leaders, there's Roku, which is small but mighty. It's carving out a growing niche and gaining viewers, and it's competing with the major players.
It had a blowout third quarter, with a 20% increase in revenue. What's notable is that the growth is coming from both of its segments, each of which had some struggles recently.
The main growth driver is the platform segment, which is mostly advertising revenue. It's by far the larger of the two businesses, accounting for 86% of total revenue. This is where it also has the most potential as advertisers move over from traditional broadcast television to ad-supported streaming networks. Platform sales increased 18% in the third quarter, a positive indication that advertisers are increasing their budgets again after cutting costs due to inflation.
As Roku gains viewers and drives more viewing hours, it attracts advertisers and increases advertisement space. It gained 2.3 million viewers in the third quarter, or a 16% increase from last year, and viewing hours were up 4.9 billion year over year, or 22%. Roku's free Roku channel accounted for 3% of total viewing hours in September according to Nielsen, the same share as Paramount's Paramount+ and Comcast's Peacock.
A central part of this strategy is Roku's other segment, devices. Roku has the top streaming operating system in the country, and when customers purchase a device, it brings them into Roku's ecosystem. This drives engagement with other parts of Roku's platform, such as the Roku channel. Device sales were up 33% in the third quarter, and the dual increases were an acceleration.
Roku stock is up 132% this year, but it has a wide-open opportunity. If you buy now, you'll likely thank yourself ten years from now.
No signs of slowing down
Jeremy Bowman (MercadoLibre): If you have $1,000 that you're looking to invest in growth stocks, I can't think of a better place for it right now than MercadoLibre.
MercadoLibre is a leading e-commerce and digital payments company across Latin America, and it continues to deliver rapid growth as it benefits from an expanding middle class, penetrates new markets, and ramps up new products like loans and advertising.
The company's network of businesses gives it a number of competitive advantages, including a first-party e-commerce business that anchors its third-party marketplace, a digital payment network that includes mobile point-of-sale devices for brick-and-mortar stores, and a logistics business that helps bring its shipping needs in-house.
As the company has grown, it's layered more profitable businesses over its existing infrastructure, driving margins, and it's continued to deliver blistering growth. In its third-quarter earnings report, currency-neutral revenue jumped 69.1% to $3.8 billion, and its operating income jumped 131% to $685 million, with its operating margin roughly doubling to 18.2%.
MercadoLibre has reported minimal profits for most of its history, but that's clearly changed as its business model has matured, and its profit margins should continue to expand over the long term.
The stock recently reached a new 52-week-high, rallying following the recent earnings report, and MercadoLibre has continued to post gains even as many of its e-commerce and digital payments peers have struggled in the current economy. With plenty of growth opportunities ahead of it and profit margins ramping higher, the stock should continue to be a winner.
