3 Top Growth Stocks to Buy on the Dip
The recent dip in the market indexes erased half the year's gains year to date, with the S&P 500 index up 9% on the year. But investors can take advantage of the sell-off to get better value on select companies with excellent growth prospects.
Here's why three Motley Fool contributors believe DraftKings (NASDAQ: DKNG), Lyft (NASDAQ: LYFT), and Roku (NASDAQ: ROKU) are great stocks to buy right now.
The momentum in online sports betting is real
John Ballard (DraftKings): Online sports betting is a $45 billion market that is gradually spreading across the U.S. Since bottoming out in 2022, DraftKings stock has nearly tripled 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 business is still not profitable. It generates positive free cash flow, but it was only $51 million over the last year. It's going to need to grow that substantially to justify the stock's $15 billion market cap.
The second reason the stock is down is valuation. DraftKings has consistently reported above 20% year-over-year growth every quarter, and management is guiding for this year's revenue to be up approximately 41%. There is clearly a lot of demand for its digital sports betting and gaming services, but no matter what valuation metric you look at, there's a lot of growth already priced into the shares.
That said, the stock could rebound toward new highs as DraftKings improves profitability. It recently announced it will begin charging customers a tax surcharge in select states starting next year. While this could hurt revenue from customers unwilling to pay the extra charge, the company will likely offset any missed revenue opportunities with better margins.
Management is targeting adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) between $900 million and $1 billion in fiscal 2025. Using the company's EBITDA guidance, the stock is reasonably valued for a growth stock and could surprise to the upside over the next few years.
Lyft is ready for real growth
Jeremy Bowman (Lyft): Lyft, the No. 2 ride-sharing operator behind Uber, has burned nearly every investor who's owned the stock over its history.
It's now down roughly 87% from its post-IPO high, and the stock is sitting near all-time lows after a sell-off driven by weak guidance in its second-quarter earnings report. While you might think based on its stock chart that the company is doomed, it's quietly turned around its business and is delivering solid growth. It also just reported its first-ever quarterly profit on a generally accepted accounting principles (GAAP) basis.
The company has cut costs through layoffs and other operational improvements, and it's accelerated growth by improving customer and driver satisfaction. It allows women drivers and riders to choose to match with other women, for example, and it's allowed drivers to geo-fence their territory so they don't get stuck with a long ride they don't want to. It's also introduced advertising, following in Uber's footsteps and adding a valuable new revenue stream.
Those efforts have paid off. The company is expecting rides growth to increase in the mid-teens this year and slightly faster growth in gross bookings. It's targeting adjusted EBITDA of 2.1% as a percentage of gross bookings and expects positive free cash flow for the year, or around $300 million.
Those margins should continue to improve, and the stock now trades at a trailing price-to-earnings ratio of just 11. That looks like a great price to pay for a business steadily improving and in an industry that looks set to steadily grow.
Growing sales and a falling price spells opportunity
Jennifer Saibil (Roku): Roku keeps growing, and its stock keeps falling. When there's a mismatch like that, it usually spells opportunity. But is it that simple?
Roku is the top streaming operating system in North America, and it's facing intense competition from companies like Amazon. It 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 ads it sells as well as sales from third-party deals with other streaming networks. Both of these segments are growing.
But the viewer metrics are the meat of Roku's story. Everyone who has a Roku device has an account, and Roku tracks accounts and viewing hours. Accounts increased 14% year over year to 83.6 million in the 2024 second quarter, and streaming hours increased 20%. These numbers are important for Roku because they demonstrate to advertisers that there are more people watching, and that means more exposure for advertisers. As hours increase, there are also more hours to fill with ads.
Trends keep moving in a favorable direction for Roku. Viewers continue to move over to streaming, and Roku has an edge with its top operating system. Its free Roku channel is also increasing in popularity, and viewing hours on the Roku channel increased 75% year over year in the second quarter.
So why is the stock down? Roku is still reporting losses, and it's not expecting to become net profitable anytime soon. Gross margin was narrower year over year in the second quarter, but operating loss improved from $126 million last year to $71 million this year. That's still a large 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 straight quarter.
Wall Street analysts are expecting Roku stock to gain an average of 23% over the next 12 months, or as much as 98%. If you have some appetite for risk, it's a great time to buy Roku stock.
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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 the Dip was originally published by The Motley Fool