3 Top Growth Stocks to Buy on the Decline

The recent slide in market indices has wiped out half of the year-to-date gains, with S&P 500 the index increased by 9% per year. But investors can take advantage of the selloff to get better value for certain companies with excellent growth prospects.

Here’s what three Motley Fool contributors think DraftKings (DKNG -0.66%), Lyft (LYFT -3.08%)and Roku (ROKU -0.92%) there are great stocks to buy right now.

The moment of 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 hitting its 2022 low, DraftKings shares have nearly tripled, but are currently down 57% from their 52-year high for weeks.

The opportunity is huge, but investors should note why the stock is volatile. First, the business is not yet profitable. It generates positive free cash flow, but it was only $51 million in the past year. It will need to grow substantially to justify the stock’s $15 billion market cap.

The second reason the stock is down is the valuation. DraftKings has consistently reported more than 20% year-over-year growth in each quarter, and management is recommending this year’s revenue grow by about 41%. There’s clearly a lot of demand for its digital sports betting and gaming services, but whichever valuation you look at, there’s already plenty of upside to the stock.

That said, the stock could return to new highs as DraftKings improves profitability. It recently announced that it will start charging customers an additional fee in certain states starting next year. While this could hurt revenue for customers who don’t want to pay the extra fee, the company will likely make up for any lost 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 up the coming years.

Lyft is poised for real growth

Jeremy Bowman (Lyft): Lyft, the 2nd largest ride sharing operator behind Uberit has burned almost every investor who has owned the stock throughout its history.

It’s now down about 87 percent from its post-IPO high, and the stock is near all-time lows after a selloff prompted by weak guidance from its second-quarter earnings report. While you might think based on its stock chart that the company is doomed, it has quietly turned its business around and is delivering solid growth. It also just reported its first quarterly profit based on generally accepted accounting principles (GAAP).

The company cut costs through layoffs and other operational improvements and accelerated growth by improving customer and driver satisfaction. It allows drivers and riders to choose to match with other women, for example, and allows drivers to fence off their territory so they don’t get stuck with a long ride they don’t want. Advertising is also introduced, following in Uber’s footsteps and adding a valuable new revenue stream.

These efforts paid off. The company expects travel ridership growth to rise into the mid-teens this year and slightly faster growth in gross bookings. It targets 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 price-to-earnings ratio of just 11. That seems like a great price to pay for a business that’s steadily improving and in an industry that appears to be steadily growing.

Increase in sales and decrease in price is an opportunity

Jennifer Saibil (Roku): Roku continues to grow and its stock continues to fall. When there is such a mismatch, it usually means an opportunity. But is it that simple?

Roku is the top streaming OS in North America and faces stiff 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 the enabled screens themselves, and the platform segment, which is the advertising it sells, as well as third-party sales parts with other streaming services. networks. Both segments are growing.

But viewership values ​​are the meat of Roku’s story. Everyone with a Roku device has an account, and Roku keeps track of accounts and watch hours. Accounts grew 14% year-over-year to 83.6 million in the second quarter of 2024, and streaming hours increased 20%. These numbers are important to Roku because they prove to advertisers that there are more people watching, and that means more exposure for advertisers. As the hours grow, there are even more hours to fill with ads.

The trends continue to move in a favorable direction for Roku. Viewers continue to switch to streaming, and Roku has an advantage with its top-tier operating system. Its free Roku channel is also growing in popularity, with watch hours on the Roku channel up 75% year-over-year in the second quarter.

So why did the stock drop? Roku is still reporting losses and is not expected to become net profitable anytime soon. Gross margin was narrower year over year in the second quarter, but the operating loss improved from $126 million last year to $71 million this year. This is still a large operational loss, but there have been other improvements. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and free cash flow were both positive for the fourth consecutive quarter.

Wall Street analysts expect 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, now is a great time to buy Roku stock.