Everyone loves bargains and the same goes for the stock market. But while picking up items for sale in a store is a simple task, picking up cheap stocks is a more complex endeavor.
Because a cheap stock often means it’s gone through the wringer, and the immediate question that comes to mind is, why did the stock take a beating?
A down stock can be lower for a variety of reasons, from weak fundamentals to broader macroeconomic concerns to unreasonable investor behavior. Of course, the trick to buying the dip, as the saying goes, is to spot the names that are only temporarily off the air and will rebound.
But how do you find these bargains? Some advice from the Wall Street pros might come in handy here. After all, it’s their job to point out which stocks are worth leaning into at any given time.
With this in mind, we’ve opened up the TipRanks database to find out more about two stocks that have recently experienced major drops, but which certain Street analysts recommend investors take part in the time-honoured act of “buying the dip” prior to an expected getting up. Here are the details.
Roblox Company (RBLX)
We’ll start with a look at a gaming and metaverse company, Roblox. Roblox has been around since the early 2000s, providing users with an interactive platform to create, play, and share games – and interact with each other through them. Roblox bills itself as a metaverse company, offering its users more than the usual online experience can provide. The company has combined community building with gaming to foster creativity and positive relationships among its users.
Some numbers reflect the size of Roblox’s business. As of the end of the second quarter of this year, Roblox boasted some 65.5 million daily average users, who spent more than 14 billion hours on the platform. This huge user base makes Roblox one of the world’s top platforms for the under 18 audience. The company is popular with its target users and owes that popularity to its ability to develop a community among users, gamers and developers.
In the recently reported results for 2Q23, Roblox showed an increase in the top line. Sales were $680.8 million, a 15% year-over-year gain.
Other results were not so solid. Bottom-line earnings, a net loss EPS figure of 46 cents per share, compared unfavorably to 2Q22’s 30 cent net loss EPS, but were 2 cents less than expected. The company delivered $38 million in adjusted net EBITDA and reported $780.7 million in bookings, a forward-looking metric that came in well above $639.9 million in the same quarter last year.
However, the results were not what the analysts were looking for. Bookings expectations were $785 million and EBITDA was $46 million. The miss here was decisive, as RBLX shares are down 23% this month, with most of the loss coming after the earnings announcement.
For Wedbush analyst Nick McKay, the key points here are Roblox’s strong position and user base, combined with a reduced price point that gives investors an attractive entry point. McKay writes of Roblox, “The Q2:23 results revealed some weaknesses within the company, but we think the data trackers, seasonality, and stubbornness contributed to the misses. On balance, Roblox has arguably the most attractive growth trajectory among video game names in our coverage universe, taking into account its user base size, new products and potential to rethink its earnings approach.
“With Roblox stock trading well below our price target following a sell-off, the risk/reward profile has turned positive…We expect patient investors to be rewarded with continued revenue growth resulting from the expansion of key user metrics, a range of new product introductions, and a more aggressive approach to cost control in future periods,” added McKay.
Looking ahead at RBLX stock, McKay rates the stock as Outperform (a buy), with a price target of $37 implying a one-year upside of 24%. (Click here to view McKay’s track record)
The Street is also generally bullish on Roblox, with 18 recent analyst reviews breaking down into 12 Buys, 2 Holds, and 4 Sells, for a moderate Buy consensus rating. The trading price of $29.83 and the average price target of $39.05 add up to a 31% year-to-date gain. (To see Roblox stock forecast)
Kornit digital (KRNT)
Kornit Digital then brings high-tech and textile together. The company is a global digital printing company, specializing in high-speed industrial inkjet printing technology, and also produces pigments and other chemical products. These are used in a range of textile industries including clothing, apparel, homeware and decoration; Kornit’s printing machines can translate complex designs from the computer directly onto the fabric and finished fabric products, enabling textile workers to recall patterned products on demand.
The ability to do this, create patterned finished products as needed, enables textile artists, makers, and factories to free up inventory space, eliminate redundancies, and otherwise streamline operations. Kornit’s customers can use the technology to support direct-to-garment solutions for a more sustainable fashion industry, generating less waste and overproduction and producing a seamless experience to keep customers returning.
Although Kornit holds a leading position in its niche, the stock is down 27% so far in August. The company’s losses have fallen in the days following the August 9 release of its Q2 2023 financials. Kornit posted a sixth consecutive quarter of net negative earnings per share, even though its non-GAAP loss of 15 cents per share was 6 cents better than expected. On the top line, the company’s earnings fell short of $56.2 million, down 3.3% year-over-year and more than $550 million below forecast. The missed earnings contributed to the stock’s fall, as did a 2H future earnings guide that came in 7% lower than Wall Street’s forecast.
When it’s all over, Morgan Stanley analyst Erik Woodring believes Kornit’s share price loss is a gain for investors as it opens up the stock to opportunistic buying. Woodring notes the headwinds but says the company has plenty of room for growth, writing: “We are looking past near-term challenges to what we believe should still be a year of robust growth in 2024, and continue to forecast high revenue growth of 20% Y/Y in CY24 (+26% Y/Y vs. +28% Y/Y previously), albeit off a lower starting base for 2023. With a 3.0x target EV/Sales multiple, we imply that KRNT’s shares continue to trade at a slight discount to its 2015-2019 valuation, when the company increased sales by double digits, given the risks associated with the weak near-term spending environment. [are] driving our upgrade to Overweight.”
That upgrade to Overweight (Buy) comes with a $29 price target, suggesting confidence in a 26% gain over the 12-month horizon. (Click here to view Woodring’s track record)
Looking more broadly, Kornit has 5 recent stock reviews, with a breakdown of 3 Buys and 2 Holds supporting a Moderate Buy consensus score. Shares trade at $23 and have an average price target of $29.60; this suggests a 29% increase from current levels. (To see Forecast Kornit shares)
To find great ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that brings together all of TipRanks’ stock insights.
Disclaimer: The opinions expressed in this article are solely those of the recommended analysts. The content is for informational purposes only. It is very important to do your own analysis before making an investment.
