2 Downward Growth Stocks You May Regret Not Buying

Stock market crashes look bleak on a chart as long as we limit ourselves to a short time horizon. But the more we zoom out, the more it looks like minor blips as stocks always bounce back and continue their upward march. That’s why investing in stocks with attractive prospects during bear markets is a good idea. There’s hardly a better time to apply half of the most fundamental investment advice: “Buy Low.”

But even if we’re not in a bear market, buying stocks from down stocks that have what it takes to bounce back is also a great move. Consider two such stocks: DexCom (DXCM 3.70%) and Roku (ROKU 0.58%).

1. DexCom

DexCom’s stock recently fell following its second-quarter financial results. What exactly caused the market to short the company’s stock? The diabetes-focused medical device specialist revealed it is not attracting as many new customers as expected.

Meanwhile, many consumers took advantage of discounts during the period, which hurt the top line. DexCom’s third quarter guidance wasn’t great either. And given its richly priced stock, it’s not shocking to see a bit of a correction. However, DexCom’s price-to-earnings (P/E) ratio is still 39, more than twice the healthcare industry’s average P/E of 19.

DXCM PE report data (before) by YCharts.

These are arguments against stocks, but what about the DexCom bull case? Where will the company be in 10 years?

First, it’s important to point out that DexCom is one of the leaders in continuous glucose monitoring (CGM), a technology that has been shown in many studies to improve health outcomes for patients with diabetes. However, there is a vast addressable market here. DexCom’s main competitor, Abbott Laboratoriesestimated that only 1% of the “half a billion adults” worldwide with diabetes have access to CGM technology.

DexCom’s addressable market is much smaller, at least for now. However, there is plenty of fuel for growth even in countries where they already operate. In the US, the percentage of CGM users is far below that of eligible patients with third-party coverage.

In addition, DexCom is building a competitive advantage. The company’s technology is compatible with other digital health devices and applications, from pens and insulin pumps to smartphones and Apple Clock. The more users in its ecosystem, the more attractive it becomes for third parties to make their devices compatible with DexCom’s technology — an example of the network effect.

Ultimately, DexCom is an innovative company that should continue to produce new gems. Its G7 has been on the US market since last year and is the most accurate CGM around. It also recently launched an over-the-counter CGM option in the US

Despite the recent decline, DexCom’s long-term outlook is exciting. Stocks should deliver huge returns over the next decade, just as they have in the past.

2. Roku

Roku is the leader in streaming – the company’s vast ecosystem has 83.6 million households. While its financial results haven’t been terrible this year, investors are particularly worried about a few metrics. Let’s consider two of them.

The first is average revenue per user (ARPU). In the second quarter, Roku’s ARPU was flat at $40.68, even as its revenue grew 14% year-over-year to $968.2 million. The second is Roku’s conclusion: the company is not profitable. In the second quarter, Roku posted a net loss per share of $0.24, although that was much better than the loss per share of $0.76 reported in the year-ago period.

Can Roku overcome these two hurdles and deliver solid returns over the next decade? From my point of view, the answer is yes. In terms of its ARPU, Roku pointed out that it is starting to gain more users in international markets. For now, they are concerned with scale in these regions, not monetization. Still, this should be a big growth factor for Roku.

While the streaming industry continues to make strides, it still only accounted for 41% of TV viewing time in the US in August. So there is a huge opportunity there. Once Roku is more established in these regions, the company’s monetization efforts will intensify, leading to stronger ARPU and revenue growth.

And while the red ink on the bottom line might be a problem, Roku’s platform segment, most importantly, is profitable. The platform business brings in revenue from ads, operating system licensing deals, and more.

The company records the sale of its namesake streaming player in its devices segment — which is not profitable. Roku chooses to sell these devices at a loss for good reason. For now, growing its ecosystem is the most important thing. With a large enough user base, monetization opportunities will increase, as will revenue. That’s Roku’s path to profitability, a milestone it should reach well before 2034.

And in the meantime, the company has the tools to recover and deliver huge returns. I think you would do well to invest in stocks while they are still down.