There's a popular saying, attributed to Warren Buffett, that suggests investors should be fearful when others are greedy and greedy only when others are fearful. Put another way, the best stock buying opportunities often occur when investor sentiment is at its lowest. That's not where the overall market is today, but there are some stocks out there that are still viewed unfavorably by Wall Street, presenting a buying opportunity for investors.
To be clear, these opportune stocks still face their challenges, but the risk/reward from today's prices makes them compelling for long-term investors. Wall Street might be sleeping on these stocks, but I'm not. Here are three examples to prove my point.
1. Peloton
During the pandemic, at-home fitness company Peloton (PTON 4.29%) was a darling of Wall Street. The prevailing assumption was that at-home fitness was an undeniable trend and Peloton would be the biggest winner. It may still be the case that Peloton is the biggest winner in this space, but it's fair to say the market opportunity might be significantly smaller than what investors were hoping a few years ago.
Under its former CEO and co-founder, Peloton emphasized hardware sales at premium prices, supported by a growing and sticky subscriber base. This model proved to be unsustainable once the world reopened after the pandemic, and the company has pivoted more to being a subscription-first company. Peloton has started discounting its equipment, selling it on third-party websites like Amazon, and focusing on its strong user base.
The most recently reported quarter, Q1 of 2024 (ended in Sept. 2023), included some mixed results. Total members decreased by 4% year over year, but connected fitness subscriptions increased by 2%. More importantly, Peloton continued to get its financial house in order. The company's operating loss in Q3 of 2023 was $132 million, a considerable improvement from the operating loss of $374 million in the year-ago quarter.
The company is slowly working its way back toward profitability, but considering slowing user growth and revenue growth, the progress seen on the bottom line so far is encouraging.
2. Roku
On the one hand, while Peloton is making progress on the bottom line, streaming device manufacturer Roku (ROKU -10.29%) is still struggling to make progress toward profitability. Roku's net loss increased by 170% in Q3 of 2023. Some of this was due to restructuring expenses related to layoffs, but Roku still has work to do here.
On the other hand, the primary metrics that are important for Roku are heading in the right direction. Active accounts in Q3 grew by 16% year over year, and streaming hours increased by 22%. Roku would like to have seen these impressive growth metrics translate into higher average revenue per user, but this measure decreased by 7% year over year in the quarter due to an advertising market that remains soft.
These are important metrics to track because most of Roku's revenue comes from advertising. Once the advertising market recovers, Roku should see a recovery in its ability to monetize its users.
Investors should keep an eye on Q4 2023 results when they are reported in the coming weeks. The company is expecting adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be $10 million. This would be a significant improvement over the adjusted EBITDA loss of $95 million in Q4 of 2022. Generally accepted accounting principles (GAAP) profitability may be further off, but getting to adjusted profitability is a good first step.
3. Twilio
Communications software company Twilio (TWLO 1.47%) was recently in the news when it was announced that its founder and CEO would be stepping down effective immediately. This may not be a surprise, considering how much Twilio's stock has struggled since its most recent high. The stock is currently trading for 84% less than it did in 2021.
The last year or so has seen Twilio's revenue growth slow considerably, making its history of cash burn and unprofitability a concern for Wall Street. To be fair, the company has made progress on the bottom line, but it has been slow-going.
In Q3 of 2022, Twilio posted an operating loss of $457 million and a net loss of $482 million. This improved over the course of 2023, and in Q3 of 2023, the operating loss had improved to $109 million, while the net loss was only $142 million. These metrics are still not where they need to be, but considering this improvement came in the face of slowing revenue and customer growth, it demonstrates the company's ability to run more efficiently.
Perhaps more encouraging has been Twilio's progress with cash generation. In Q3 of 2023, cash from operations was $206 million, up from negative $116 million in the year-ago quarter. If Twilio can continue to produce positive cash flow and pick up the pace of its march toward profitability, investors may see impressive returns from today's stock price.
