The stock market has seen extreme volatility over the past couple of years, with inflation and rising interest rates hitting growth stocks especially hard. Many former high-flyers have yet to recover from the massive sell-off, leaving some quality growth companies significantly undervalued.
However, the old adage says to buy low and sell high, so now could be an opportune time to scoop up shares of strong businesses at bargain prices before an inevitable rebound.
With that in mind, our Motley Fool experts highlighted Roku (NASDAQ: ROKU) and Roblox (NYSE: RBLX) as two of their top picks for undervalued growth stocks to buy in October 2023. Both have robust long-term prospects but are currently trading 70-85% below previous highs, presenting savvy investors a chance to get in early before gains materialize.
Roku Poised for Big Gains as Headwinds Abate
Roku operates a streaming video platform used by millions to access entertainment content and has established itself as a leader in the cord-cutting revolution. However, the stock has plunged 86% from all-time highs reached in the summer of 2021.
Contributor Anders Bylund believes most of the issues afflicting Roku are temporary and foreseeable catalysts could drive a powerful rebound.
The initial sell-off was exacerbated by rising inflation and interest rates, as many viewed Roku as an overly risky asset given economic uncertainty. However, the company now carries no long-term debt, boasting a pristine balance sheet with $1.8 billion in cash.
Roku is also generating losses as advertising spend has slowed amidst inflationary pressures, but ad budgets should come roaring back once conditions improve.
Roku’s user base has continued growing despite lockdowns ending, with active accounts up 33% over the past two years to 73.5 million. The shift toward streaming still appears to be in the early innings, evidenced by Roku adding 1.1 million net new accounts last quarter.
The company has invested heavily in its ad business, acquiring both content and technology to better monetize its audience scale.
As Bylund notes, Roku’s growth trajectory is reminiscent of Netflix during temporary challenges in 2011, when that stock fell nearly 80% before rebounding to handsomely reward patient investors.
He believes Roku could stage a similarly epic turnaround over the next few years as the economic backdrop normalizes, presenting a compelling opportunity while shares are beaten down.
Roblox Leveraging Metaverse Leadership into New Monetization Avenues
While best known as a gaming platform, Roblox operates an immersive virtual world that goes far beyond typical video games. Users even create and monetize their own experiences to be shared on the platform.
Over two-thirds of all 9-12 year olds in the United States use Roblox each month, showcasing impressive engagement among younger demographics.
In the second quarter, Roblox grew revenue 15% year-over-year to $680.8 million as total engagement hours rose 24% to 14 billion. However, the company is still in the early stages of extracting value from its user base and virtual world dominance.
Contributor Keith Noonan sees promising new digital advertising efforts as one key avenue for expansion.
Roblox had previously shied away from in-game marketing, but more recently started allowing Developers to integrate select premium brand sponsorships. While nascent, the company’s exploring several ad formats and has tremendous potential to capitalize on its highly engaged user base.
Noonan also highlights Roblox’s push into AI as a long-term driver, with the company rolling out generative tools to help Users easily build immersive 3D experiences. As AI becomes more mainstream, Roblox could emerge as a leader in user-friendly creation of AI-powered metaverse content.
Trading 76.5% below its peak, Roblox offers substantial upside if execution lives up to the business’ immense possibilities. The innovative company sits at the intersection of gaming, user-generated content, and AI, pillars of the future internet. While risky, buying this fallen growth stock near its nadir could result in market-crushing returns over the long haul.
In risky growth stocks like Roku and Roblox, significant price declines often create unique buying opportunities for investors with long time horizons. Though near-term headwinds have pushed their share prices down drastically, the underlying businesses still hold exciting potential.
Buying quality assets when they go on sale and holding through temporary disruptions has proven a winning formula over market history. Therefore, adding either of these beaten-down innovators to your portfolio while they’re heavily discounted could pay off in a big way down the road.