The recent decline in market indices has wiped out half of the gains made in the past year so far, S&P 500 index up 9% year-on-year. But investors can take advantage of the sell-off to get better value for select companies with excellent growth prospects.
Here’s Why Three Motley Fool Contributors Believe DesignKings (NASDAQ: DKNG), Lyft (NASDAQ: LYFT)And Roku (NASDAQ: ROKU) are great stocks to buy now.
The momentum in online sports betting is real
John Ballard (DraftKings): Online sports betting is a $45 billion market that is slowly spreading across the U.S. DraftKings stock has nearly tripled since its 2022 low, but is currently down 57% from its 52-week high.
The opportunity is huge, but investors should note why the stock is volatile. First, the company is still not profitable. It generates positive free cash flow, but it was only $51 million last year. It will have to grow that substantially to justify the stock’s $15 billion market cap.
The second reason the stock is falling is valuation. DraftKings has consistently reported year-over-year growth of more than 20% each quarter, and management predicts revenue will grow by about 41% this year. There’s clearly a lot of demand for its digital sports betting and gaming services, but no matter which valuation metric you look at, there’s a lot of growth already priced into the stock.
That said, the stock could rebound to new heights as DraftKings improves profitability. The company recently announced that it will begin charging a sales tax surcharge to customers in certain states starting next year. While this could hurt sales for customers who aren’t willing to pay the extra fee, the company will likely make up for any lost revenue opportunities with improved margins.
Management is targeting adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of between $900 million and $1 billion in fiscal 2025. Based on the company’s EBITDA guidance, the stock is fairly valued for a growth stock and could surprise on the upside in the coming years.
Lyft is poised for real growth
Jeremy Bowman (Lyft): Lyft, the #2 in ride sharing Uberhas disappointed almost every investor who has owned the stock throughout its history.
It’s now down about 87% from its post-IPO high and the stock is near an all-time low after a sell-off sparked by weak guidance in its second-quarter earnings report. While the stock chart might make you think the company is doomed, it has quietly turned its business around and is delivering solid growth. It also just reported its first-ever quarterly profit based on generally accepted accounting principles (GAAP).
The company has cut costs through layoffs and other operational improvements, and it has accelerated growth by improving customer and driver satisfaction. It has allowed female drivers and riders to choose to match with other women, for example, and it has allowed drivers to geofence their territory so they don’t get stuck with a long ride they don’t want. It has also introduced advertising, following Uber’s lead and adding a valuable new revenue stream.
Those efforts have paid off. The company expects ride growth to climb into the mid-teens this year, with gross bookings growing slightly faster. It’s targeting adjusted EBITDA of 2.1% as a percentage of gross bookings and expects positive free cash flow for the year, or about $300 million.
Those margins should continue to improve, and the stock now trades at a trailing price-to-earnings ratio of just 11. That seems like a great price to pay for a company that’s steadily improving and in an industry that appears to be steadily growing.
Growing sales and falling prices offer opportunities
Jennifer Saibil (Roku): Roku keeps growing and its stock keeps falling. When there’s a mismatch like this, it usually means opportunity. But is it that simple?
Roku is the most popular streaming operating system in North America and faces stiff competition from companies like AmazonIt has two business segments: the device segment, which is the devices it sells to enable streaming from a screen or enabled screens themselves, and the platform segment, which is the advertising it sells and the sales from third-party deals with other streaming networks. Both segments are growing.
But the viewership metrics are at the heart of Roku’s story. Everyone who owns a Roku device has an account, and Roku tracks accounts and hours watched. Accounts grew 14% year-over-year to 83.6 million in Q2 2024, and streaming hours grew 20%. Those numbers matter to Roku because they show advertisers that more people are watching, and that means more exposure for advertisers. As hours increase, there are more hours to fill with ads.
Trends continue to move in a favorable direction for Roku. Viewers continue to switch to streaming, and Roku has a head start with its best-in-class operating system. The free Roku Channel is also growing in popularity, with hours watched on the Roku Channel increasing 75% year-over-year in the second quarter.
So why has the stock fallen? Roku is still reporting losses and doesn’t expect to be net profitable anytime soon. Gross margin narrowed in the second quarter from a year ago, but its operating loss improved to $71 million this year, from $126 million a year ago. That’s still a big operating loss, but there were other improvements. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and free cash flow were both positive for the fourth quarter in a row.
Wall Street analysts expect Roku stock to rise an average of 23% over the next 12 months, or as much as 98%. If you have a little risk appetite, now is a good time to buy Roku stock.
Should You Invest $1,000 in DraftKings Now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. Jeremy Bowman has positions in Amazon and Roku. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Roku, and Uber Technologies. The Motley Fool has a disclosure policy.
3 Top Growth Stocks to Buy on a Dip was originally published by The Motley Fool
