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2 Beaten-Down Growth Stocks to Buy

The Motley Fool
The Motley Fool
 2021-12-03

The stock market sometimes offers opportunities to long-term investors to buy stocks at lower prices. Two cases in point are streaming-platform Roku (NASDAQ: ROKU) and interactive exercise-equipment maker Peloton (NASDAQ: PTON) .

Each stock has been beaten down significantly in 2021. The cause for the declines is primarily due to macroeconomic factors that are out of the companies' control. The coronavirus pandemic created a surge in demand for Roku and Peloton, but the economic reopening has had the opposite effect. Still, their long-term growth prospects remain positive.

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Peloton wants a machine in every household

Peloton grew revenue at more than 100% per year for several years -- even before the onset of the pandemic. Folks appreciate the connected-fitness devices that allow them to exercise at home while feeling part of a community.

One of the factors underlying the rapid growth is the convenience of exercising from home vs. a gym. Some people can complete an exercise routine on a Peloton bike or treadmill in less time than it would take to get to your gym and find parking.

Peloton sells its customers exercise machines and a subscription that grants access to live and recorded workouts. The subscription portion of the business is what's exciting for investors. That's because eventually Peloton could reach a point where most everyone who wants one of its machines will have one, and the only hardware sales will be from upgrades or replacements. Since the machines tend to be long-lasting, those revenues could be scant.

By contrast, households that already have a machine could continue paying the subscription fee ($39 per month) for several years or far longer. What's more, the subscription service is a lot more profitable. In Peloton's latest quarter, the gross profit margin was just 12% for the equipment and an impressive 67% for the subscriptions.

Indeed, one of management's long-term goals is to get its product into as many households as possible to get them on a subscription plan. The surge in demand during the pandemic accelerated that plan. But now the economic reopening is slowing the rate of growth , and investors are concerned.

Yet Peloton remains hugely popular. As of the latest quarter, it had 2.5 million subscribers, and by the end of 2022 management forecats 3.4 million. So I believe investor worries will fade and Peloton's fortunes will turn around.

Supply chain bottlenecks are plaguing Roku

Streaming-platform pioneer Roku also experienced a surge in demand at the pandemic's onset. People stuck at home looked for ways to entertain themselves, and streaming video content was an obvious choice. You didn't need a professional installer to come to your home to hook up the cable or satellite. All you needed was a connected TV or a Roku player that turned any TV into a connected TV.

As the pandemic evolved, new problems emerged. Supply chain disruptions caused shortages of materials used in Roku's devices. Roku took the customer-friendly option of absorbing the higher costs rather than passing them along through higher prices on its players. The result is a falling gross profit margin in Roku's player segment.

Roku is similar to Peloton in that it makes money through both hardware and services. The hardware consists of the Roku players that connect TVs to its platform. The service is the viewing content streamed on Roku's platform which brings in advertising revenue.

At present, the streaming service is hugely profitable with a 65% gross profit margin in the company's most recent quarter . By contrast, its hardware is sold at a 15% loss, which Roku finds is worthwhile doing in order to capture new customers and increase time spent viewing content on its platform.

Over the long term, more content viewing is moving to streaming instead of cable. Roku is in a great spot to benefit from that long-running secular tailwind. That said, the near term will be volatile as economies reopen -- and that's what investors are focused on now. Result: Roku's stock is down 37% year to date.

Overall, the coronavirus pandemic benefited these two companies, and their stocks surged as a result. The economic reopening has had the opposite effect, and their stocks are getting hammered. What didn't change much are the positive, long-term prospects for Roku and Peloton. That's what makes them excellent growth stocks you can buy right now.

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Parkev Tatevosian owns shares of Roku. The Motley Fool owns shares of and recommends Peloton Interactive and Roku. The Motley Fool has a disclosure policy .

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