The bear market of 2020 didn't last very long, but it has the definite potential to return as the stock market ended the year way out of touch with the realities of the current economy. As a result, many top growth stocks are seeing falling prices so far in 2021, as traders begin to migrate back into value stocks.
But this volatility shouldn't deter you from buying growth stocks. On the contrary, it presents an opportunity to buy some of these stocks at a discount and take advantage of bigger gains over the long term. How long term? That's still to be determined. But prices reversed pretty quickly after the March 2020 sell-off. That may not happen again, but it's a sure bet to happen at some point.
If you have $5,000 that you don't need for current expenses, to bolster your emergency fund, or for some other use in the next three to five years, and you are looking to invest in the stock market, take a look at Peloton Interactive (NASDAQ:PTON), Roku (NASDAQ:ROKU), and MercadoLibre (NASDAQ:MELI). These tech companies may not qualify as traditional stock bargains, but all three are trading well down from their 52-week highs and all three have a long runway toward growth.
Image source: Peloton Interactive.
1. Peloton: The home fitness movement
Peloton turned itself from an obscure elite company before the pandemic to a mainstream powerhouse post-lockdowns. That's not to say it wasn't doing well even before; its sales grew 77% and 66% in the second and third quarters of 2020, respectively, but things were beginning to slow down. Not so anymore. Sales exploded over the past three quarters as fitness enthusiasts reached for the home gym.
| Metric | Q4 2020 | Q1 2021 | Q2 2021 |
|---|---|---|---|
| Sales growth (YOY) | 172% | 232% | 128% |
| Connected fitness subscriptions growth (YOY) | 113% | 137% | 134% |
| Paid digital subscriptions growth (YOY) | 210% | 382% | 472% |
Data source: Peloton Interactive quarterly reports. YOY = year over year.
Now that gyms are beginning to reopen, is there any hope for the company to keep up this kind of growth? Yes.
Over the past year, Peloton has made several moves to solidify its newfound status as a fitness industry leader. It introduced several new products, including treadmills and lower-priced models. It forged a deal with entertainer Beyonce to make exclusive music for its platform, and it acquired commercial exercise company Precor to expand its market. More recently, Peloton management announced that the company will start selling its products in Australia, and has launched a partnership with adidas.
Peloton's stock price had quite a run in 2020, gaining 440%, but it's down almost 30% in 2021. It's still trading at 163 times trailing-12-month earnings, but there's so much more growth to come that the valuation is not unreasonable.
Image source: Getty Images.
2. Roku: The other side of streaming
Walt Disney and Netflix have been big winners in the trend toward streaming services. But Roku, which also makes devices for streaming, had the best stock gains of the bunch over the past year, gaining more than 450%. And Roku is still only just beginning to grow its services.
In 2020, the Roku OS was the top smart TV operating system in the U.S. with a 38% unit share of smart TVs sold, according to Roku management. That helps it compete with the likes of Amazon in terms of users (even as it offers Amazon Prime as one of the channels on its service). While its device sales are strong (up 18% year over year in Q4), Roku is actually generating more revenue from ad sales and platform use fees from other services. Its ad-supported streaming offerings (including its own Roku channel) saw revenue increase 81% year over year in the fourth quarter and the segment now accounts for 72% of overall revenue. Advertisers are increasingly leaving traditional television channels and moving over to streaming platforms that offer better targeting of ads, and Roku is claiming a significant share of those sales.
Total net revenue increased 58% year over year in the fourth quarter, and Roku surprised analysts by reporting a profitable quarter. That's two in a row, suggesting maybe future profits won't be surprising. For the first quarter of 2021, Roku management expects sales to grow year over year by about 51% at the midpoint of estimates and a net loss between $23 million and $16 million.
Roku's stock price is up 6.8% year to date, and investors should expect further gains from this developing company.
Image source: Getty Images.
3. MercadoLibre: Digital payments in an emerging market
One share of MercadoLibre's stock was selling for about $1,550 on Wednesday, so $5,000 isn't going to get you many shares of this company. But share amount doesn't really matter -- price gains do. MercadoLibre's stock price gained 225% in value over the past year, and that's after the stock price has fallen 27% from its 52-week high. But don't let the recent drop fool you, MercadoLibre's price growth is far from finished.
The Latin American fintech company operates e-commerce sites in 18 countries, as well as a digital payment division called Mercado Pago. Much of the company's potential market is considered underbanked, and MercadoLibre provides solutions for this population to manage payments.
Revenue increased 150% year over year in the fourth quarter, Mercado Pago total payment volume increased 134%, and gross merchandise volume grew 110%.
Active users grew 71% to 74 million, and the company has a market of 635 million people in an area with one the fastest-growing internet penetration rates. Between the available market of underbanked customers and the increasing penetration rates, and between all of the company's parts, MercadoLibre has a strong trajectory of growth, and it could be an excellent addition to your portfolio.
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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