The market isn’t always rational, and that could be good news for forward-thinking investors. If the market assigns a low value to a stock based on short-term factors, that provides a hot opportunity for investors to get a low price on a stock that might have huge growth potential.
We asked three Motley Fool contributors which beaten-down stocks they see as having great growth prospects to give you some ideas, and Peloton Interactive (NASDAQ:PTON), Stitch Fix (NASDAQ:SFIX), and Roku (NASDAQ:ROKU) all made the cut.
Leading the connected fitness revolution
Jennifer Saibil (Peloton Interactive): Peloton stock has had a quite a ride since debuting on the stock market in late 2019. That’s because the relatively unknown and niche company exploded while people stayed home in the early stages of the COVID-19 pandemic.
Revenue increased triple-digits for the first four quarters of the pandemic, and the company had a hard time keeping up with demand. Supply issues coupled with surging demand meant that buyers have had to wait months to get a bike. Sales were still strong in the fourth fiscal quarter ended June 30, but they decelerated to a 54% increase.
Prior to the pandemic, growth was also beginning to slow. The question now is whether it will revert to those trends, or if the landscape has sufficiently changed to keep Peloton at the forefront of home fitness. Management is making moves to energize growth in the post-restriction climate, such as acquisitions and rollouts in new regions. Most recently, it said it would cut the price of its original connected fitness bike by $400 to $1,495 to widen its market and make up for some of what will be lost revenue due to otherwise slowing demand.
It remains to be seen how well that will work with the overall strategy. In the meantime, the market is not reacting kindly to Peloton’s forward outlook, which is guiding for a mere 5% revenue growth in the first quarter. After a 400% run-up in 2020, the stock is down 33% year to date.
Of course, you wouldn’t expect Peloton to keep up its outstanding growth while people head out again, and a revenue increase after such high growth means Peloton is in a better place than the market reflects. One promising metric is connected fitness memberships, which increased 114% year over year in Q4 to 2.3 million. Peloton’s strategy is to engage these customers and provide lifetime value, solidifying its place as a leader in not only connected fitness, but fitness overall.
Although you can expect volatility, Peloton should ultimately demonstrate lasting growth and provide gains for investors.
Data science and apparel is a powerful combo
John Ballard (Stitch Fix): Stitch Fix combines data science and a human touch to deliver a personalized apparel styling service to a growing base of 4.1 million active clients. It was regularly posting revenue growth of more than 20% per year before the pandemic through calendar 2019 and could be a timely stock to buy ahead of its next earnings report on Sept. 21.
The pandemic caused a temporary slowdown in apparel spending and disruptions to Stitch Fix’s warehouse operations, which caused revenue to decline at the start of the pandemic last year. But over the last four quarters, revenue has accelerated nicely, up 3%, 10%, 12%, and 44% in the most recent quarter.
One near-term catalyst for the company is the back-to-school season. Even with kids learning from home last year, Stitch Fix reported that sales rocketed 60% higher year over year for kids apparel. With schools open this year, Stitch Fix should report strong numbers with the kids business.
Strong performance in kids could spill over to other categories for adults. During the last earnings call in June, management reported seeing growth in client requests for work-related categories.
In the long run, Stitch Fix is well positioned to capture a growing market share of the estimated $127 billion of online apparel spending in the U.S. and U.K. alone. It’s a massive opportunity compared to the company’s trailing-12-month revenue of $1.97 billion, which has already doubled over the last four years.
At a market capitalization of $4.3 billion, Stitch Fix can deliver big returns for investors who buy shares today and remain patient.
The streaming content pioneer as advertising dollars follow people
Parkev Tatevosian (Roku): Roku is a streaming content enabler that is gaining popularity worldwide. To get folks to sign up to its platform, it sells players that connect to TVs. It also licenses its platform to TV manufacturers that make it the default operating system. At the end of its fiscal second quarter of 2021, Roku boasted a total of 55.1 million active accounts, a 28% increase from the year prior.
Roku is happy to sell its players at a small profit or even at a loss to get customer signups. That’s because its platform segment is profitable enough to make up for the loss in the player segment. The platform segment has generated $956 million in gross profit in the last three quarters, while the player segment has only generated $12.7 million.
Zooming out, Roku benefits from a long-running trend where folks cancel traditional cable subscriptions and switch to streaming services. That trend is unlikely to reverse, considering how convenient and affordable the latter is compared to the former.
Unsurprisingly, advertisers are following consumers. According to The Wall Street Journal, connected TV ad spending is estimated to increase by 25% to $16 billion this year and reach $31 billion globally by 2026.
Despite its positive long-term prospects, the stock is down 12% in the last month. The company reported second-quarter earnings results on Aug. 4, and management highlighted short-term headwinds. Economic reopening is leading people to spend less time on Roku’s platform. Moreover, supply chain shortages make it difficult for the company to source materials for its players, likely creating another quarterly gross profit loss in the segment.
Still, Roku’s prospects remain excellent, and the sell-off is an opportunity for long-term investors looking for a beaten-down growth stock to add to their portfolios.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.