To say that the market no longer likes growth stocks is an understatement. Ever since the Federal Reserve indicated it would start raising interest rates, growth stocks have plunged. Higher interest rates lower the present value of future cash flows, reducing what investors are willing to pay for growth stocks.
netflix (NFLX -2.98%), Airbnb (ABNB -1.18%)and Roblox (RBLX -10.39%) were not spared from the bombardments. Each has seen their share price drop significantly from their high waters. Yet underlying the stocks are solid companies that could improve over time. Here’s why now is a great time to buy these battered growth stocks before a market rally.
In addition to the market selloff, Netflix gave the market yet another reason to sell its shares. During its first quarter, which ended March 31, the company reported its first quarterly drop in subscriber numbers in more than 10 years. Additionally, he told investors to expect 2 million additional losses in Q2. It was the only reason the market needed it, and the stock is down 72% from its peak.
With 222 million subscribers, the streaming pioneer is the industry leader. This scale has increased Netflix’s revenue from $8.8 billion to $29.7 billion over the past five years. During the same period, operating profit fell from $380 million to $6.2 billion. The streaming wars are likely to produce more than one winner, and Netflix should be one of them.
The sale offers investors a chance to buy Netflix at a price-to-earnings (P/E) ratio of 17.5, near its lowest valuation on record.
Airbnb was devastated at the start of the pandemic. People’s willingness to travel has drastically diminished, and Airbnb’s revenue has fallen 30% in 2020. Since then, the global travel facilitator has been booming. From the company revenues rebound higher than pre-pandemic levels, and changes during the pandemic have allowed profitability to soar. Indeed, in its last quarter ended March 31, revenue was 80% higher than in the same quarter of 2019.
Meanwhile, despite rebounding from 2020, global travel demand is still well below pre-pandemic levels. The gap suggests Airbnb has plenty of room for growth as consumers eagerly take long-delayed vacations. Airbnb does not own the properties listed on its platform. Instead, it encourages landlords to list rooms, homes, garages, treehouses, or other unique spaces on the Airbnb platform. The business model allows it to rapidly expand supply in response to consumer demand.
Considering Airbnb’s revenue is higher than in 2019, while global travel demand has yet to recover to those levels, this suggests that Airbnb is rapidly gaining market share. Like Netflix above, the sale of growth stocks allowed Airbnb to sell at a price close to its lowest free cash flow.
Finally, Roblox is the pioneer of the metaverse. The company which mainly caters to the younger generation has rapidly increased its revenue and cash flow. Of course, it helped that kids were sent home for remote learning during the pandemic, giving them more time to engage with Roblox.
Sales have exploded from $325 million in 2017 to $1.9 billion in 2021. Roblox is free to join and use, so the company makes money selling items and premium experiences that require Robux. The company outsources these designs to third-party developers who are promised a percentage of the revenue generated from their designs.
The strategy has been excellent for generating cash flow, even though the company is not profitable in terms of results. Indeed, Roblox’s operating cash flow jumped to $659 million in 2021, from less than $200 million in 2019 and 2020.
Unsurprisingly now, Roblox is also selling at close to its cheapest value never at a free cash flow of around 32.
The widespread pessimism of growth stock investors has these excellent actions trades at favorable prices. Investors can buy now before a stock market rally eliminates the opportunity.