Some stocks can swing wildly in the near term, and this is why many long-term investors like to buy stocks on the dip. Investors know it’s the performance of the business over many years that builds wealth, so buying the stock at a discount from its previous highs can offer a more attractive value to improve returns.
With that in mind, let’s see why the following Motley Fool contributors believe now is the right time to buy Roku (NASDAQ: ROKU), Lululemon Athletica (NASDAQ: LULU), and Celsius Holdings (NASDAQ: CELH).
Don’t give up on this streaming winner
Jennifer Saibil (Roku): Roku keeps pumping out higher sales and improving profits, and its stock keeps falling. It’s down 35% this year and 87% from highs in 2021.
Let’s talk a bit about what’s going on. Roku, as many readers know, makes streaming devices. It’s the leading streaming company in the U.S. by hours streamed, and it’s also the top-selling streaming device brand in the U.S. However, its main source of sales is its advertising partnerships. It’s gone through some ups and downs over the past few years, soaring with the onset of the pandemic and then pulling back in the aftermath. Sales growth has been brisk, but it’s very stuck in the land of the unprofitable.
Investors have become really down on Roku this year, though, despite its growth, and it looks like it’s a bit much. Total revenue increased 19% over last year. Streaming households, its new term for accounts, increased 14% year over year, while total streaming hours were up 23%. Average revenue per user was flat year over year, which is better than some of the declines the company has reported.
Profitability, or lack thereof, is improving. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased from a $69 million loss last year to positive $41 million this year in the first quarter, and net loss improved from $194 million to $51 million. Free cash flow for the trailing 12 months was positive and increasing for the third consecutive quarter at $427 million.
What started the landslide was Walmart‘s announcement in February that it was acquiring Roku competitor Vizio. Even though Vizio doesn’t look like a threat to Roku, having Walmart’s backing scared investors. That news came on the heels of a tepid fourth-quarter earnings report, and Roku stock has continued to slide.
The good news for investors is that this is a great opportunity to buy shares of a top company on the dip. Roku stock trades at 2.3 times trailing-12-month earnings, a cheap valuation for a stock with its potential.
Buy the sale on Lululemon
John Ballard (Lululemon Athletica): Lululemon has been an incredible growth story over the last few decades. The company’s annual revenue grew at an annualized rate of 20% over the last 10 years, with annualized growth accelerating to 24% over the last two years. The stock followed suit, delivering a cumulative return of almost 700%. For anyone who has followed the athletic apparel industry, Lululemon’s growth is no surprise, as the trend toward athleisure has been driving very consistent sales growth across the industry for years.
The stock recently fell after the company’s quarterly update in March. Lululemon reported lower-than-expected revenue growth for the fiscal fourth quarter, and guidance didn’t leave investors feeling any better. Management expects full-year top-line growth to land between 11% and 12% year over year. That is not the level of growth investors have come to expect from Lululemon.
Here are two important reasons to buy the dip:
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Lululemon’s lower growth reflects an industrywide slowdown. In fact, Lululemon’s guidance for double-digit revenue growth is head and shoulders above the world’s leading brands that are forecasting single-digit sales increases this year. Nike‘s fiscal 2024 revenue is pacing to be up just 1% year over year.
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Lululemon stock is now trading at its most attractive valuation in years. Shares currently trade at a price-to-earnings ratio of 28. The stock briefly traded at this level most recently in March 2020, and before then in 2017.
Overall, nothing has changed the long-term growth trajectory for the industry. The long-term trends driving demand for athletic wear, including active lifestyles and athleisure, will continue to fuel growth for Lululemon as it has over the last 20 years.
This doesn’t mean the stock can’t hit new lows in the near term, but I believe investors who buy today and hold over the next decade will do well with their investment.
This growth story is far from over
Jeremy Bowman (Celsius Holdings): Celsius Holdings, the energy drink maker, is one of the best-performing stocks on the market over the last four years, up about 5,000%. The brand has grown from a niche player in the beverage industry, popular in gyms and health clubs, to a mainstream beverage brand, sold everywhere from Costco to convenience stores. And it posted triple-digit revenue growth in many of its quarters along the way.
However, more recently, Celsius stock has pulled back from its peak in March, down by about 25% since then. There hasn’t been any major catalyst for that pullback. It seems more a combination of concerns about its valuation and changes in the macro outlook as persistent inflation has led investors to suspect that the Fed won’t lower interest rates this year.
For long-term investors, Celsius’ drawdown seems to offer a solid entry point. The company just reported first-quarter results so we have a clear picture of the business. Shares pulled back modestly as Celsius missed revenue estimates with reported revenue growing 37%, but that was primarily due to an inventory adjustment by PepsiCo, the distribution partner responsible for purchasing 62% of its product.
Underlying growth remained strong. According to data from Circana, an industry research firm, Celsius’ sales in the key U.S. chain-store channel jumped 72%, showing that the brand remains red-hot. Even better, Celsius’s margin surged during the quarter as it also controlled its inventory and benefited from lower input and material costs. Earnings per share more than doubled from $0.13 to $0.27 as a result.
Celsius still has a lot of whitespace for growth, including international markets, which only make up a small fraction of sales today, and in new channels like restaurants and food service, where it’s just starting to gain exposure thanks to placement from Pepsi.
As Celsius gains share and expands the energy drink category, it’s easy to imagine the beverage stock growing to approach the size of Monster Beverage, whose market cap is more than triple that of Celsius currently. Investors can get a good entry point by taking advantage of the recent sell-off and buying the stock today.
Should you invest $1,000 in Roku right now?
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Jennifer Saibil has no position in any of the stocks mentioned. Jeremy Bowman has positions in Nike and Roku. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius, Costco Wholesale, Lululemon Athletica, Monster Beverage, Nike, Roku, and Walmart. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
3 Incredible Stocks You’ll Regret Not Buying on the Dip was originally published by The Motley Fool
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