Warren Buffett once told investors they should remember two things: “First, widespread fear is your friend as an investor, because he offers advantageous purchases. Second, personal fear is your enemy.”
These words deserve to be revisited in the current economic climate. Over the past year, the three major US equity indices have fallen into bearish territory, dragged down by high inflation, rising interest rates and fears of recession. But savvy investors know that fear-driven downturns are buying opportunities — not because every battered stock will rally, but because they leave many companies brimming with trading potential at depressed valuations.
Here are two growth stocks that fit this later description that I consider excellent buys ahead of the next bull market.
Roku: the most popular streaming platform
Many brands have cut advertising budgets as discretionary consumer spending has fallen in response to high inflation. This trend led to disappointing third quarter results for Roku (ROKU 0.34%). Its revenue rose just 12% to $761 million – a considerable deceleration from its 51% growth in the year-ago period – and it posted a loss according to GAAP of $0.88 per diluted share, versus earnings of $0.48 per diluted share per year. earlier. These results contributed to the continued steep decline in Roku’s share price, which was triggered by broader economic uncertainty and business challenges.
Now is a good time for investors to take a step back and look at the bigger picture. Streaming media undoubtedly continues to take audience share from traditional linear TV, and Roku is the most popular streaming platform in the United States, Canada, and Mexico, measured by streaming hours. In other words, Roku engages viewers more effectively than its competitors, making it an especially valuable partner for content publishers and advertisers.
Additionally, management has set out an ambitious growth strategy that aims to drive engagement and strengthen the moat around its business. The company is investing in content (licensed and original) for its ad-supported streaming service, The Roku Channel, and those investments are paying off. In the third quarter, The Roku Channel again ranked among the platform’s top five channels in the United States in terms of engagement.
Roku is also expanding into smart home devices, including cameras, video doorbells, and lighting. It might seem like an odd direction for the company’s growth, but Roku is already the top-selling smart TV operating system in the US, so the company has “the technology and the expertise in hardware, software and services to deliver a simple, powerful and enjoyable smart home ecosystem,” according to CEO Anthony Wood.
Finally, Roku is expanding internationally at a measured pace. It brought its advertising business to Canada in 2021, and it brought its advertising business and The Roku Channel to Mexico in 2022, expanding its revenue opportunities in two countries where it ranks as the top streaming platform.
Going forward, Roku may continue to struggle in the short term, but its strong market position and centuries-old shift to streaming media should allow the company to return to profitability in the future. According to research firm Omdia, online video ad spending is expected to grow at an annualized rate of 14% over the next five years to reach $362 billion in 2027, putting Roku ahead of a large addressable market. And with shares trading at 1.7x sales – the cheapest valuation since Roku’s IPO in 2017 – it’s a good time to buy this growth stock, especially because the company has a good chance of reaccelerating sales growth when the economic climate becomes more difficult. favorable.
Upstart: Disrupting the Multi-Trillion Dollar Lending Industry
The precarious economic situation has been even more troublesome for Assets received (UPST 0.46%), a fintech company that operates an artificial intelligence-powered lending platform. Loan default rates tended to rise as inflation put financial pressure on consumers, and banks tightened their lending policies in response. Meanwhile, rising interest rates have made it more expensive to borrow money, leading to lower demand for credit.
That one-two punch led to dismal third-quarter results for Upstart. Loan origination volume fell 48% year-over-year to $1.9 billion, revenue fell 31% to $157 million and the company reported an adjusted loss of $19 million dollars, down from adjusted earnings of $57 million in the prior year period. Worse still, management expects its revenue to drop more than 50% year-over-year in the fourth quarter. This gloomy outlook, coupled with its disappointing financial results and the uncertainty surrounding its new business model (i.e. the use of artificial intelligence to assess credit risk), sent the stock plummeting. 97%
However, the stock now trades at 1.1 times sales, its lowest ever valuation. More importantly, the fintech’s underlying investment thesis is still intact: traditional FICO-based credit models take into account a limited number of data points, which means that banks often make lending decisions without understanding the true risk a borrower presents. This results in higher loss rates and drives up interest rates for all borrowers, as those who repay their loans will end up subsidizing defaulting borrowers. Upstart aims to eliminate these inefficiencies. Its platform takes far more data into its analysis than FICO-based models, and it uses artificial intelligence to correlate those data points with fraud and default risk.
This ultimately results in lower loss rates for lenders. In fact, one study found that Upstart reduced default rates by 53% at the same approval rate compared to traditional credit scores. Even better, for all loans issued since 2018, Upstart’s artificial intelligence engine separated high-risk borrowers from low-risk borrowers five times more accurately than FICO-based models. If the company can produce similar results during this tightening phase of the credit cycle, adoption of its platform could skyrocket when inflation cools and interest rates fall. Until that happens, Upstart shareholders can expect extreme volatility.
With that in mind, Upstart estimates its addressable market at $1.5 trillion, a huge opportunity compared to its lending volume of $1.9 billion in the last quarter. That’s why risk-tolerant investors should consider buying this growth stock today.