2 stocks down to buy and hold

The phrase “pandemic stock” is sometimes applied to companies whose products or services caught the attention of investors in the early days of Covid-19. The Fintech giant PayPal Holdings (PYPL -0.80%) and streaming media specialist Roku (ROKU 4.96%) belonged to that group, climbing to new heights in 2021.

As the public health crisis eased, it was mostly down for both stocks. Over the past three years, shares of PayPal and Roku are down about 75% and 81%, respectively, at recent prices. But they were always more than pandemic stocks. Here’s why both could still deliver market returns for patient shareholders.

PYPL data by YCharts

1. PayPal

While PayPal’s revenue and active accounts aren’t growing as fast as in 2020 and early 2021, the company is still seeing consistent earnings and impressive total payment volume (TPV). In the second quarter, PayPal’s revenue rose about 8% year-over-year to $7.9 billion. PayPal’s POS reached $416.8 billion, up 11% year-over-year. And the company’s earnings per share rose 17% year over year to $1.08.

One of the key reasons PayPal appears to be on the rebound is that the company’s business is evolving. PayPal’s new CEO, Alex Chriss, who took over last year, has made plans to revitalize growth.

One of PayPal’s initiatives under Chriss’ leadership will be building an advertising platform. Although it’s a ruthlessly competitive industry, PayPal has a bit of a head start. The company had 429 million active accounts at the end of the second quarter, though that was down 0.4% year over year. Still, this is a massive ecosystem for potential advertisers to exploit.

PayPal’s most important growth drivers will continue to be the expansion of the fintech industry and the growth of digital payments. The PayPal brand is better known and trusted than many of its peers. After all, he is a pioneer in the industry. And adding new revenue initiatives like advertising — others will follow, which is why Chriss was brought in — will help boost the company’s bottom line even more.

PayPal shares are up nearly 15% in the past month and are barely trailing the S&P 500 for the year at this writing. Even so, the stock trades at a forward price-to-earnings (P/E) ratio of 17.4, only slightly richer than the average for the financial industry as a whole.

PayPal may not have performed well over the past three years, but its long-term outlook remains solid.

2. Roku

Streaming is the future of entertainment — and also the present. The Roku platform features most of the prominent streaming services in one convenient place.

Roku makes most of its money from advertising, so the more consumers join its ecosystem, the more attractive it becomes to companies that want to advertise on its platform — an example of the network effect. The company had 83.6 million accounts in the second quarter, a 14% increase over the same period a year earlier. Streaming hours increased 20% year over year to 30.1 billion. As a result, the company’s top line continued to grow at a decent pace. Roku’s revenue of $968.2 million was up 14% year over year.

However, Roku remains unprofitable. Its loss per share improved from $0.76 in Q2 2023 to $0.24 this time. With interest rates rising and economic conditions somewhat challenging, investors are less forgiving of red ink on the bottom line.

Still, at current levels, the Roku seems worth the investment. At recent prices, its shares were valued at 2.5 times expected earnings over the next 12 months, a fair premium given its strong position in an industry that has grown incrementally. limit in the last decade, but still has enough room to keep growing.

In July, streaming accounted for 41.4% of total TV viewing time in the U.S. While Roku has its own streaming channel, its core business is to provide access to streamers, not compete with them. As long as viewers spend more time streaming, Roku wins. The US is one of the most saturated streaming markets, but there’s still plenty of fuel for growth globally.

Roku is the largest connected TV platform in North America, and thanks to its network effect, it can maintain its leadership for a long time. This is why the company could provide long-term market returns.