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Motley Fool Issues Rare “All In” Buy Alert
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Some of the most incredible investing opportunities come from the divergence between a stock’s declining share price and its improving operations. Five companies highlighting this divergence today are Roku (ROKU -3.58%), DigitalOcean (DOCN -2.19%), Olaplex (OLPX -7.72%), Shopify (SHOP -3.77%), and The Trade Desk (TTD -2.91%). Despite their struggles year to date, here’s what makes these discounted stocks so promising.
Down 73% so far in 2022, it almost looks like the market is valuing connected TV (CTV) wizard Roku solely for its unprofitable streaming players.
These streaming devices, however, are more of a means to an end for Roku, as they put the company’s platform of content in front of over 65 million active accounts as of the third quarter of 2022.
This platform accounted for 86% of revenue in the most recent quarter, growing by 15% year over year, and is crucial to Roku’s growth ambitions. Generating revenue from ad sales (on The Roku Channel and other streaming channels) and content distribution (revenue sharing from streaming apps on its platform) Roku’s vital metric to watch is average revenue per user (ARPU).
Growing by 10% year-over-year to $44.25 in the third quarter, ARPU has risen from $28.76 at the end of 2020. This growth looks robust considering the pullback in ad spending so far in 2022.
With traditional TV still receiving an estimated 57% of ad spending as of 2022, Roku should thrive as CTV continues rising in prominence.
With a price-to-sales ratio (P/S) of 2.5, Roku is near all-time lows valuation-wise, despite its burgeoning platform segment offering immense potential.
ROKU PS Ratio data by YCharts.
Offering a simplified cloud platform for entrepreneurs and small businesses, DigitalOcean is quickly building out a unique niche and differentiating itself by focusing on businesses that are too small to matter to its huge cloud competitors.
For DigitalOcean, these small businesses and start-ups provide potential as the company increases its sales alongside its smaller customers’ growth. Despite this potential, revenue growth above 25% each of the last four years, and positive free cash flow, DigitalOcean trades below its 2021 initial public offering (IPO) price.
However, DigitalOcean sported a rising net dollar retention rate of 118% as of its most recent quarter, showing that its existing customers continue to spend more each year, underscoring its potential.
Trading at an all-time low of 20 times cash from operations (CFO), DigitalOcean’s growth prospects and unique niche appear attractively priced.
DOCN Price to CFO Per Share (TTM) data by YCharts.
Holding over 100 patents with an average of 13 years remaining before their expiry, Olaplex has created its own “bond-building” niche in the hair care industry. Through its 14 products, Olaplex helps customers “treat, maintain, and protect” their hair, offering a regimen that helped the company record an incredible net promoter score of 71, which indicates how willing customers are to recommend the products to a friend.
With growing popularity on TikTok and Instagram, Olaplex has quickly become a top prestige hair care brand across social media.
So what’s the problem?
Olaplex posted sales growth of 9% for Q3 2022 — a frightening slowdown compared to its 112% growth from 2020 to 2021. The company’s share price has dropped dramatically thanks to this rapidly decelerating growth.
OLPX data by YCharts.
However, Olaplex’s net income remained steady despite this top-line, leaving it with an attractive price-to-earnings ratio (P/E) of 14. The company has an incredible 38% net income margin. As the company continues to distance itself from tough 2021 comparables and continues its international expansion, look for this highly profitable brand to make a rebound.
Enabling omnichannel sales through its large (and growing) ecosystem, Shopify has always offered investors an intriguing investment proposition — especially as it eyes international markets. However, an investment in Shopify has also been expensive, with the company trading at a P/S higher than many companies’ P/Es.
In the third quarter, Shopify reported that revenue increased 22% to $1.4 billion and its net loss was $158.4 million.
SHOP PS Ratio data by YCharts.
Trading at 9.7 times sales, Shopify is far from cheap. Even if we gave it a hypothetical net income margin of 10%, it would trade at 97 times earnings. However, the company is one of the most influential business-building machines in the United States, owning a reported 29% market share of software used to make e-commerce sales.
Best yet, Shopify is built to thrive alongside its customers (much like DigitalOcean) and is now partnered with Global-e Online to allow for a growing list of possible cross-border sales. Investors should watch for this global expansion to help reinvigorate Shopify’s shares.
Operating in a global ad industry worth over $800 billion, The Trade Desk, its ad-buying platform, and its Unified ID 2.0 tracking system are reimagining how digital ads get to consumers. Growing revenue by 31% for Q3 2022 year over year, led by even higher growth from CTV, Trade Desk extended its incredible history of increasing its top line.
Despite this incredible rise, the company’s share price has dropped over 40% year to date as the advertising market struggled in 2022, and the Trade Desk couldn’t live up to its high-flying valuation.
Averaging a stunning P/S of 24 across the last five years, Trade Desk still looks to be priced for perfection regardless of its drop this year.
TTD PS Ratio data by YCharts.
However, the company should see a decades-long tailwind from delivering ads to connected television. Furthermore, its anonymized UID 2.0 solution promises to be a major upgrade to cookies used by advertisers. With only 14% of The Trade Desk’s revenue coming from outside North America, its global potential adds another tailwind to the company’s massive growth potential.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Josh Kohn-Lindquist has positions in Amazon, DigitalOcean Holdings, Inc., Global-e Online Ltd., Olaplex Holdings, Inc., Roku, Shopify, and The Trade Desk. The Motley Fool has positions in and recommends Amazon, DigitalOcean Holdings, Inc., Global-e Online Ltd., Roku, Shopify, and The Trade Desk. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.
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