Connected TV platform company Year ( AN -4.40% ) and lending technology company Assets received (UPST -6.15% ) are the two best selling stocks. I don’t mean that their stocks are just down, although it is true: both stocks are down more than 70% from their respective all-time highs. But many other stocks have it too. However, many of the others aren’t “blue chip” stocks, and they still aren’t cheap.
On the contrary, stocks are generally Dear right now. Take, for example, the evaluation of the S&P500. According to Yardeni Research, the price/earnings ratio (P/E) of this index is around 22, compared to its historical average of less than 16. And looking at the forward P/E ratio is even more alarming. The forward P/E is around 19, compared to around 21 at the start of the year. But keep in mind that when it reached a forward P/E of 21, it was the most expensive valuation it had reached since the dotcom bubble of 2001.
Is the stock market in bubble territory? The data we have seen suggests that valuations are rich and typical of those preceding a crash. To boot, inflation is now at 40-year highs, rapidly draining consumers’ disposable cash. This means that we are also considering the possibility of an economic recession.
What I mean with all of this is that even though almost all stocks are off their highs, many are still trading at high valuations and are therefore very likely to fall further if a recession causes the market to crash. scholarship. This underscores why investors should selectively buy quality companies trading at attractive valuations. And that’s why I’m offering Roku and Upstart here.
Roku could be the main beneficiary of a massive global trend
Roku allows people to stream TV content from the internet with its pluggable devices and with its operating system installed natively on some smart TVs. In recent years, people have switched from traditional television to connected television in droves. Because of this migration, the company ended 2021 with 60.1 million active accounts, which it says is more than all US cable companies combined.
In short, Roku captured a significant chunk of valuable consumer attention – 73.2 billion hours of video content were streamed on Roku in 2021. However, even though this is where consumers are engaging, only a fraction of advertising budgets are currently spent on this medium.
According to an April report from the Interactive Advertising Bureau, less than $40 billion was spent on digital video advertising in 2021. And according to Nielsen According to estimates in Roku’s letter to shareholders, only 18% of US TV advertising budgets were spent on streaming in 2021. However, with 60 million consumers already switching to Roku, it is inevitable that many more advertising dollars will follow. Investors just have to be patient.
Roku’s installed and engaged user base is extremely large. But let’s not forget about improving the company’s technological capabilities. Recently, Roku started testing dynamic linear ad insertion. This technology makes it possible to target advertising to inhabit TV Broadcast: Different viewers of the same live content will see different and more relevant ads. These ever-improving capabilities make Roku a great place to spend advertising budgets and partly explain why in 2021 Roku retained 95% of advertisers who spent at least $1 million in 2020. They get what they pay for. .
Here’s the best part for investors: while the opportunity is still strong for Roku, it’s trading at its lowest price to sales (P/S) since late 2018, as the chart shows.
In my opinion, a P/S of six is a more than fair price to pay for a company with prospects like Roku.
Upstart has barely scratched the surface of its opportunity
Upstart hasn’t been a public company for as long as Roku. It made its initial public offering (IPO) in December 2020, so comment on its historical valuation with a grain of salt. But at the time of this writing, Upstart’s P/S valuation is below 10, which is the cheapest on record.
Whatever the reason for Upstart’s cheaper valuation, it has nothing to do with its business. So far, Upstart’s financial results as a public company have been quite promising.
Upstart offers software for banks looking to screen potential borrowers beyond the traditional credit score. As Upstart’s software evaluates loan repayments over time, it improves the loan algorithm it uses. Banks could do it alone, in theory. In practice, Upstart partners with multiple financial institutions (42 at the end of 2021) and as a result its data set is larger and better than what a single bank could produce on its own – a competitive advantage .
Upstart signed new partners left and right, resulting in rapid revenue growth. In 2021, the company generated $849 million in revenue, up 264% year-over-year. And it did so profitably, generating a net profit of $135 million. This earning power wasn’t a flash in the pan either – Upstart has been profitable or close from the start. In fact, according to CEO Dave Girouard, it generated more cash in 2021 than it burned in all previous years. combined.
Most of Upstart’s loan volume comes from personal loans. But its auto lending business is growing rapidly, and management is targeting the mortgage business — two categories far larger than personal loans. It’s true that the company is “only” targeting 65% year-over-year revenue growth in 2022. However, car loans and mortgages mean Upstart is barely scratching the surface of its opportunity at long term right now.
With stocks generally at high valuations, you want to avoid buying something that is still too expensive. But don’t stay away completely – as a long-term investor, you want your money in the market as much as possible. Therefore, look for companies that are executing and where the shares offer investors good value. After reading this far, I hope you agree that Roku and Upstart fit that description.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging 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 wealthier.