If I were you, I’d buy these two stocks before they skyrocket

By | February 26, 2024

The stock market has been kind to growth-seeking investors lately. The tech heavy Nasdaq Composite (NASDAQINDEX: ^IXIC) The market index is up more than 32% in the past 12 months, thanks to an improving economy that is making stock buyers comfortable with potentially risky ideas again.

But a number of excellent growth stocks failed to catch the freight train. This creates an imbalance between fantastic long-term business prospects and modest stock prices. Smart investors, in turn, are presented with a tempting buy-in opportunity.

Let me show you why I’m especially thrilled by the wide-open buying windows I see for media streaming platform experts Roku (NASDAQ: ROKU) and provider of restaurant management tools Toast (NYSE: TOST) straight away.

Toast’s stock price has been lower for quite some time, while Roku took a steep dive last week. Either way, I think it’s high time to invest in these great growth stocks before the market comes to its senses and sends their share prices skyrocketing again.

Roku: Down 3% in 12 months

Roku looks downright spring loaded for robust gains. Meanwhile, bearish investors seem to be eager to jump aboard this future rocket after it’s starting to take off, putting even more pressure on the already low share price.

That is cool. I don’t mind buying more shares cheaply, which will trigger the big payout again.

The bears often point to the fierce competition in the smart TV market, led by a longtime Roku customer Walmart agree to acquire Roku-less TV maker Vizio for $2.3 billion. They also complain about slow revenue growth and an unprofitable hardware business. In one example: an analyst firm Oppenheimer says it will remain on the sidelines with a “neutral” rating until Roku can achieve sustainable growth in device sales in the “high-teens” percentage.

But strong competition is nothing new for Roku, which despite challenges has a dominant share of global connected TV sales Alphabet‘s Google TV and Chromecast, Amazon‘s Fire TV, the Apple TV line and in-house software solutions from leading TV makers Samsung And LG electronics. If that horde of highly competent and entrenched rivals can’t compete effectively with Roku, I don’t see much of a threat from Walmart’s Vizio purchase either. And there’s no guarantee that regulators will approve the deal.

The stalled sales growth appears poised for a recovery in the second half of 2024 and an even stronger continuation next year. Most of Roku’s revenue comes from ad sales, and that limited market has suffered from limited ad-buying budgets since the 2021 inflation crisis began. As budget dollars trickle back into the picture, more than two years’ worth of undervalued products and services are calling for attention. That’s why I expect a sudden turnaround, not a slow crawl, back to healthy digital ad sales.

And those profit-eroding hardware sales should actually be seen as marketing costs. By keeping prices low while everyone else plays on the inflation trend by raising their software costs and device price tags, Roku has been able to grow its user base dramatically in recent years.

The company reported 60 million active accounts and 19.5 billion hours of streaming activity in the fourth quarter of 2021. Two years later, Roku had 80 million accounts and 29.1 billion streaming hours. That’s 33% more users, who spend 49% more streaming hours. This will help you build a huge user base that should yield higher advertising rates in the long run.

So I see absolutely nothing wrong with Roku’s current and future results. The profits can wait while the company gets busy building a truly great business platform for decades to come. This stock is an absolute steal, and you don’t want to be left empty-handed if those double-digit growth rates light a fuse under Roku’s stock.

Toast: up 7% in 12 months

Here’s another underappreciated growth story.

Toast sells a cloud-based software platform that helps restaurant owners, cafe managers, food truck vendors and other food service businesses run and manage their operations. From processing payments and publishing menus to tracking ingredient inventory and designing data-driven marketing campaigns, the system includes many functions normally handled by software from different vendors (or notes written on the canteen whiteboard). are scribbled).

If that sounds like a winning idea to you, we’re on the same page. Many restaurant owners agree, and Toast’s services are spreading like wildfire across the country. Fourth-quarter revenue rose 35% year over year, losses fell from $99 million to $36 million, and free cash flow came in at $92 million. The company has 106,000 customer locations, an increase of 34% compared to the previous year’s quarter.

And like Roku, Toast uses cheap hardware systems as a loss-making marketing tactic. The idea is that once you try the management system, you will never want to leave. Just put your foot in the door. Those unprofitable credit card readers and order taking tablets should pay off in the long run.

“We are well on our way to becoming the technology platform of choice for the entire restaurant industry,” CEO Aman Narang said during the earnings call with analysts. “Even in our most penetrated markets, where we have a market share of over 30%, we are still gaining market share at a healthy clip.”

Yet Toast’s stock is trading nearly 70% below its 2021 all-time high, and its shares are valued at just 2.9 times sales. That would be a reasonable ratio for some of Toast’s customers, as restaurants often have notoriously low margins and high growth is reserved for an elite group of newer names.

This is a software company that is experiencing rapid growth. Double-digit price-to-sales ratios are common in this category, even for companies with weak or non-existent cash flows.

I admit that Toast’s management has made a few unfortunate mistakes so far, such as introducing an unpopular payment processing fee. But the company quickly canceled that fee as well, showing that the company could remain flexible and listen to customer concerns.

So I understand if you’d rather watch Toast for a while to make sure the company doesn’t make a habit of problematic public relations moments. At the same time, I can’t take my eyes off the low share price and poor price-to-sales ratio – and the name Toast keeps popping up whenever I’m getting some takeaway or taking the family out for dinner. Keep an eye on Toast-branded credit card readers to see for yourself.

This growth rocket deserves better, and I highly recommend taking a chance on this innovator before the rocket ship takes off.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Alphabet, Amazon and Roku. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Roku, Toast and Walmart. The Motley Fool has a disclosure policy.

If I Were You, I’d Buy These Two Stocks Before They Skyrocket was originally published by The Motley Fool

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