A bear market is when the market sells off 20% or more. Today the S&P 500 and Nasdaq Composite aren’t currently in bear territory by definition, but many tech stocks have experienced considerable drops from their highs last year. With a long-term mindset, many investors go bargain hunting during times like these.
We asked three longtime Fool contributors for their favorite beaten-down tech stock they’d buy “on the dip.” They came back with Roku ( ROKU -2.47% ), DigitalOcean ( DOCN -4.82% ), and MercadoLibre ( MELI -3.37% ).
Image source: Getty images.
Roku: Temporary headwinds create an opportunity
Danny Vena (Roku): Sometimes the greatest opportunities happen when investors overestimate the importance of temporary headwinds. That’s clearly the case with Roku.
The streaming pioneer has created an ecosystem that continues to thrive, even in the midst of a slowdown in streaming consumption. Roku provides access to more than 10,000 streaming channels on its service-agnostic platform, offering up the best of both ad-supported and paid subscription services. The company has niche programming options for virtually any viewer and with the sheer magnitude of choices, there truly is “something for everyone.” As a result, Roku has attracted more than 60 million households to its platform.
Let’s address the elephant in the room. Given the spectacular fall of Netflix stock this week, it might appear counter-intuitive to recommend a streaming video platform, but the services these companies provide are apples and oranges. While Netflix is dependent on programming and attracting new subscribers to fuel its growth, Roku actually benefits from the higher churn of streaming services, offering not only the services viewers are canceling, but also the new ones they’re signing up for.
There’s also a common misconception about how Roku makes the lion’s share of its revenue. Some investors think Roku makes money selling devices, but its set-top boxes and streaming dongles are merely a means to an end.
Roku earns the bulk of its revenue from the digital advertising that appears on its platform. The company contracts for 30% of all ad space that is shown across the channels that live on its platform, using its extensive viewer data to inform its targeted advertising. It also controls 100% of the ad revenue generated from its wholly owned offering, The Roku Channel. Finally, the company earns a commission for each new customer who signs up for a paid subscription service.
The company’s secret weapon, however, is the Roku operating system (OS) for smart TVs, which the company developed from the ground up and licenses to smart TV manufacturers. By handling the continuous upgrades and developing state-of-the-art features (like voice control), connected TV-makers can offer cutting edge features for a fraction of the cost of developing them in house. Furthermore, digital advertising, The Roku Channel, and the Roku OS make up Roku’s platform segment, which accounts for the vast majority of the company’s growth.
In 2021, total net revenue grew 33% year over year, which was impressive, but platform revenue grew 49%. This enabled Roku to sell its devices at or below cost, which in turn expands the company’s growing account base. It also helped Roku generate a profit in 2021, reversing course from a loss in 2020.
Investors were spooked recently, as Roku’s active account growth and streaming hours decelerated after a pandemic-related boost. That said, viewers aren’t likely to abandon streaming video altogether, though they may change the channel.
These fears give savvy investors the opportunity to buy Roku shares at a price-to-sales ratio of less than six, its lowest price in more than three years — even as its large and growing opportunity remains.
Image source: Getty Images.
Digital Ocean: The company bringing a sea change to the cloud
Will Healy (DigitalOcean): Admittedly, the prospect of a small cloud provider competing against Amazon‘s AWS and Microsoft‘s Azure seems more destructive than profitable at first glance. At a market cap of just over $5 billion, DigitalOcean is less than 1% the size of each of its largest rivals.
However, DigitalOcean could beat its competition by serving a market ignored by the largest players — small and medium-sized businesses (SMBs). The company allows SMBs to benefit from the efficiency of the cloud by offering straightforward, low-cost plans, a compelling offering in an inflationary environment.
Moreover, DigitalOcean has built an additional advantage through its community. Such businesses often employ only one IT specialist. Through that community, they may consult with other DigitalOcean clients to help resolve issues. The company also offers a library of information that clients can utilize for the same purpose.
So far, it has attracted about 609,000 clients in 185 countries. And in 2021, its revenue of $429 million rose 35% compared with 2020. Moreover, net dollar retention in 2021 came in at 113%. This means that current clients spent $1.13 for every $1 they spent in the prior year, a strong indication of client satisfaction.
Also, the company forecasts between $564 million and $568 million in revenue for 2022, a 32% increase at the midpoint. This is a less significant drop in revenue growth than many other cloud companies have experienced in a post-lockdown environment.
Still, the company does face challenges. The volatility of SMBs can mean high client turnover. Also, the large players could introduce simpler plans to try to compete.
However, even well-funded competitors will struggle to copy DigitalOcean’s community. Also, the stock price decline of almost 65% since November changes the value proposition. Its price-to-sales ratio is now about 11, down from more than 30 in November. With DigitalOcean’s potential to grow in almost any market environment, its current price may not stay this low for long.
Image source: Getty Images.
MercadoLibre: A long-term winner trading at a discount
Brian Withers (MercadoLibre): MercadoLibre, a Latin American e-commerce and payments leader, had an amazing 2020 with the stock almost tripling that year. But since then, investors have been disappointed. The stock peaked in January 2021 and has been on a general downward trend since then, losing more than 45% of its value. The company reported five quarters of solid earnings during that time. Let’s take a look at why you’ll want to consider buying this gem on the dip.
As mentioned, the last five quarters have been stellar for the company’s growth. Its most recent quarter had a 61% year-over-year gain on the top line, on top of a 97% year-over-year gain the same quarter from the previous year. These last five quarters of growth are testament to the massive investments the company has made into its e-commerce platform, but also the growth in its fintech segment powered by its popular payment platform.
|
Metric |
Q4 2020 |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
|---|---|---|---|---|---|
|
Revenue |
$1.327 billion |
$1.378 billion |
$1.703 billion |
$1.857 billion |
$2.131 billion |
|
YOY revenue growth |
97% |
114% |
94% |
67% |
61% |
|
Commerce revenue |
$873 million |
$911 million |
$1.142 million |
$1.225 million |
$1.358 million |
|
Fintech revenue |
$454 million |
$468 million |
$560 million |
$633 million |
$773 million |
Data source: MercadoLibre earnings presentation. Calculations by author. YOY = year over year.
In the most recent quarter, the commerce segment (made up of revenue from the e-commerce marketplace and associated services) grew to $1,358 million, a 56% growth from the previous year. The fintech segment (powered by the company’s payments platform, related to both its marketplace and off-platform payments) grew to $773 million, a 70% gain from the previous year. The company continues to invest heavily in both of these segments to maintain its leading position in the region.
This success has been tremendous, but the market is always forward-looking and wants to know what’s ahead. For MercadoLibre the future looks bright. Currently over 93% of the company’s top line comes from three countries: Brazil, Argentina, and Mexico. It’s making considerable investments in Uruguay, Columbia, Chile, and Peru to serve these countries not only with its marketplace, but also its Mercado Pago payments platform and its Mercado Envios logistics services. The investments in logistics and payments infrastructure provide tailwinds for the marketplace platform and should accelerate growth in these countries.
Additionally, the company is hard at work behind the scenes shoring up its platform. At the end of 2021, it had 9,471 staff dedicated to product development and technology, an 82% increase from the previous year. According to the 10K filing, this increase helped drive “improvements in our ecosystem products, such as Mercado Envios and our Fintech solution.” At its heart, MercadoLibre is a tech company and continues to concentrate on ensuring its solutions are easy to use and high-functioning for customers. This investment provides a solid foundation for the company to continue growing at a rapid pace for years to come.
With MercadoLibre trading at discounted valuations not seen in more than five years, it’s a great time to pick up a few shares of this Latin American specialist on the dip.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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