Investors often dream of buying the small stocks that become the biggest companies in the market. Ruffled tops such as Amazon once traded as small caps, and today’s investors continue to seek the Next Amazon.
No analyst can guarantee they’ve found this stock, and the potential may not seem obvious until the stock moves past small cap status. But while some volatility can be tolerated, companies like Roku (ROKU -0.83%) and Assets received (UPST -3.66%) hold the potential for considerable returns.
1. Roku remains a solid leader in streaming
In many ways, Roku looks like the future of television. The streaming service company succeeded in attracting content providers, audiences and advertisers to its platform.
This audience continues to grow despite the effects of the economy or post-pandemic reopenings. In Q3 2022, streaming hours jumped 21% year over year, while active accounts grew 16% to over 65 million.
At the end of the second quarter, Roku led the world with a 23% market share on devices, according to an industry report from Conviva. However, this is due to holding a 32.6% market share in North America, the most mature market. Unfortunately, outside of North America, he has to compete with people like Amazon, Appleand Samsung.
Additionally, in its latest report, Roku cited economic difficulties in the advertising market. That meant its fourth-quarter guidance called for a reduction in both platform and player revenue year-over-year, a sharp decline for a company that saw 55% revenue growth in 2021. Additionally, after it turned profitable in 2021, a loss of $261 million and lower revenue make profitable 2022 unlikely.
As a result, the stock plunged, losing almost 90% of its value from its intraday peak of around $491 per share in July 2021.
However, investors can be reassured by its price/sales ratiowhich has fallen to an all-time low of just under 3. If the ad can make a short-term comeback, and assuming the platform can make gains on rivals outside of North America, investors could make massive gains if they buy the dip on roku stock.
2. Upstart is ready for a comeback
Upstart has begun to disrupt a longstanding method of determining creditworthiness – Issac Fairthe FICO-score. It uses artificial intelligence to approve more loans while reducing the risk of default. Amid rapid growth and the prospect of industry disruption, the stock soared in 2021, briefly rising above $400 per share.
However, since then, Upstart stock has fallen nearly 95% from its all-time high. The fact that just two banks make up the majority of its business has long weighed on investors. Additionally, lower loan volumes amid higher interest rates hit earnings hard, a factor that led investors to dump equities.
And given these changes for the worse, one can understand the decline. In the third quarter of 2022, revenue fell 31% to $157 million. This is a dramatic change from the first quarter, when annual revenue growth was 156%.
But despite all its challenges, the model seems to be working. For example, FICO’s highest-rated borrowers defaulted by 10.2% when they received Upstart’s lowest rating. By comparison, they only defaulted 0.7% of the time when FICO and Upstart gave a borrower their highest ratings. Thus, Upstart’s model can approve more loans without increasing risk.
Also, after starting out with personal loans, the company last year ventured into the much larger auto and small business loan markets. It also plans to assess mortgages, which will again increase the size of its addressable market.
And thanks to the decline in the stock price, the P/S ratio has fallen below 2. This is a massive discount considering it peaked near 44 in September 2021. As more and more lenders are beginning to realize that they can lend money more securely. using Upstart’s tool, it could get back to its peak of $400 per share and beyond.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. will heal has positions in Roku and Upstart Holdings, Inc. The Motley Fool has positions in and recommends Amazon, Apple, Roku and Upstart Holdings, Inc. The Motley Fool recommends Fair Isaac and recommends the following options: Long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.