After the Federal Reserve stated in late 2021 that it would begin raising interest rates, growth stocks have suffered a beating. Because future cash flows will be discounted at a higher rate as a result of rising rates, growing stocks are harmed by them. It’s not unusual to come across shares that have lost 50%, 60%, 70%, or even 95% of their highs recently. There are several excellent firms among the large sell-off.
Roblox (RBLX 3.82%) and Chegg (CHGG -2.77%), for example, have both fallen 75 percent and 84 percent from their highs, respectively. Long-term investors who can handle the short-term volatility may add these two stocks to their portfolios before a major rise drives them up. Here’s why each is worth considering for inclusion in your portfolio.
1. Roblox
ROBLOX is a metaverse company that allows users to interact with each other and the world virtually. To put it another way, it’s a metaverse enterprise. The software is free to download and use, which has clearly aided in Roblox’s popularity growth since then. impressively, despite the fact that consumers were spending more time inside, mobile ARPUs rose by 23% year over year at this time last year. Still, after the economic reopening began in March 2019, development slowed considerably , especially in its most lucrative US and Canada area.
The Robux entrepreneur earns money by selling Robux, an in-game currency that is required for certain tasks and items that are not accessible to free players. In 2021, Roblox earned $1.9 billion in revenue, up from just $325 million in 2018. Interestingly, some third-party developers develop premium services for Roblox. Roblox incentivizes developers by paying a share of the income their games generate. With 53.1 million daily active users, there’s plenty of money to be made. This aspect of the business model ensures that Roblox doesn’t spend money on creations unless its users do, lowering the risk of investment loss.
Of course, Roblox is up against headwinds as potential users have moved on to other interests, but that is already reflected in the stock’s price. It’s nearly at its lowest valuation, with a price-to-free-cash-flow ratio of 29.8. Growth stock investors will want to buy shares before it becomes more expensive because of a potential major rally.
2. Chegg
Chegg is a for-profit education technology firm that has struggled to keep college enrollment growing since the epidemic began. The outbreak was initially a boon to Chegg, as millions of students were away from vital on-campus services. Students sought help from Chegg with their course materials, which were in short supply because of the pandemic. Chegg’s earnings decreased dramatically as colleges started to reopen and students began returning to campus.
Chegg, nevertheless, has 7.8 million subscribers and has enhanced its competitive edge. The main reason for students to sign up with Chegg is because it offers 79 million pieces of unique content that were built at the request of students over time. Revenue in 2021 was $776 million, which was a rise from $255 million in 2017. Meanwhile, Chegg’s scale turned it from a loss-making firm to one with an operating income of $78 million in 2021.
Chegg is currently trading at a price-to-free-cash-flow ratio of 16, which is its lowest point. College enrollment will most likely rebound as COVID-19’s threat fades away. Before the stock rises higher and the chance is lost, investors may buy shares now at low prices.
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