As the major market indices hit new highs, investors can still find undervalued stocks set up for attractive returns. We'll look at two discounted growth stocks trading between 60% to 80% below their previous peaks. These businesses are experiencing growing demand for their services and trade at low valuations relative to expected earnings.
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1. Carnival
Despite rising 62% over the last year, Carnival (CCL -1.04%) stock remains deeply undervalued and trading 60% off its all-time high before the pandemic. Management has already raised its full-year guidance three times this year, as demand for cruises remains red-hot.
Carnival is a global leader in the cruise industry, with a portfolio of brands that include Costa Cruises, Aida, Seaborn, Holland America Line, Princess Cruises, P&O Cruises, and Carnival Cruise Line. Strong demand is lifting ticket prices and leading to record revenues and profitability.
Carnival generated $4.3 billion in operating profit on $26 billion of revenue over the last year. In the most recent quarter, it reported another quarterly record in revenue and profitability, yet the stock is trading at just 14 times this year's consensus earnings estimate.
This is a cheap valuation, considering that Carnival just reported its 10th consecutive quarter of record quarterly revenue. The company is set to drive further demand by investing in exclusive destinations, such as the recent debut of Celebration Key and next year's launch of Half Moon Cay in the Bahamas.
These destinations are strategically positioned to be short trips from Carnival's ports, and, therefore, keep fuel costs down. This will benefit the bottom line and drive excellent earnings growth over the next few years. Analysts expect Carnival's earnings to grow at an annualized rate of 21%.
With nearly half of 2026 sailings already booked, demand is not fading. Carnival stock's low P/E with solid demand visibility should support a rising share price.
2. Roku
Roku (ROKU 0.01%) is well positioned to capture a sizable share of advertising shifting from traditional TV to digital streaming platforms. It has more than 150 million total viewers starting their daily TV watching through Roku's connected TV platform, which is a valuable asset.
Connected TV is transforming the TV landscape, according to Nielsen, with nearly 44% of total TV watching time in the U.S. happening on streaming platforms. Consistent with that trend, ad spending in the connected TV market is estimated to hit $33 billion this year and grow to $47 billion by 2028, according to eMarketer. Roku's recent growth shows it is poised to benefit.
Roku earns a small amount of revenue from selling streaming devices, but the bulk of its business comes from platform monetization. Its platform revenue, which includes ads, subscription revenue sharing, and other services, grew 18% year over year last quarter.This shows ad spending following the viewers. This is the key signal that Wall Street has been missing the last few years, where the stock has significantly underperformed and is still down 80% from its all-time high.
The connected TV market is competitive, with Roku competing against Apple (Apple TV) and other providers. But Roku has an advantage as a budget-friendly alternative and also doesn't try to steer users to a walled garden of services like big tech companies. It offers free ad-supported content through The Roku Channel, which has been one of the most watched apps on the platform.
The stock is up 34% year to date, which is outpacing the broader market. Investor sentiment appears to be turning more positive, which is a good sign. Wall Street analysts expect the company's free cash flow to grow at an annualized rate of 42% to reach $1.2 billion by 2029. Assuming Roku meets these expectations, the stock could deliver market-beating returns over the next five years.
