The expression “pandemic stock” is sometimes applied to companies whose products or services captured investors’ attention in the early days of Covid-19. Fintech giant PayPal Holdings (NASDAQ: PYPL) and streaming media specialist Roku (NASDAQ: ROKU) belonged to that group, soaring to new heights in 2021.
As the public health crisis has eased, it’s been mostly downhill for both stocks. Over the past three years, PayPal’s and Roku’s shares are down by about 75% and 81%, respectively, at recent prices. But they were always more than just pandemic stocks. Here is why both could still deliver market-beating returns to patient shareholders.
1. PayPal
While PayPal’s revenue and active accounts aren’t growing as fast as they did in 2020 and early 2021, the company still posts consistent earnings and impressive total payment volume (TPV). In the second quarter, PayPal’s revenue was up about 8% year over year to $7.9 billion. PayPal’s TPV landed at $416.8 billion, 11% higher than the year-ago period. And the company’s earnings per share grew 17% year over year to $1.08.
One key reason that PayPal looks to be on the rebound is that the company’s business is evolving. PayPal’s new CEO, Alex Chriss, who took the helm last year, has been making plans to revitalize growth.
One of PayPal’s initiatives under Chriss will be to build an advertising platform. While it is a ruthlessly competitive industry, PayPal has a bit of a leg up. The company had 429 million active accounts as of the end of the second quarter, although that decreased by 0.4% year over year. Still, that is a massive ecosystem for potential advertisers to exploit.
PayPal’s most important growth drivers will still be the expansion of the fintech industry and the growth of digital payments. PayPal’s brand name is better known and more trusted than many of its peers. It is, after all, a pioneer in the industry. And adding new money-making initiatives like advertising — others will follow, that’s why Chriss was brought in — will help boost the company’s results even higher.
PayPal’s shares have soared by almost 15% in the past month and are barely trailing the S&P 500 for the year at this writing. Even so, the stock trades at a forward price-to-earnings (P/E) ratio of 17.4, only a little richer than the average for the financial industry as a whole.
PayPal may not have performed well in the past three years, but its long-term prospects remain solid.
2. Roku
Streaming is the future of entertainment — and also the present. Roku’s platform features most of the prominent streaming services in one convenient spot.
Roku makes the bulk of its money from advertising, so the more consumers join its ecosystem, the more attractive it becomes for businesses looking to advertise on its platform — an example of the network effect. The company had 83.6 million accounts in the second quarter, a 14% increase over the same period the year before. Streaming hours grew 20% year over year to 30.1 billion. As a result, the company’s top line kept growing at a decent clip. Roku’s revenue of $968.2 million increased 14% year over year.
However, Roku remains unprofitable. Its loss per share did improve, from $0.76 in Q2 2023 to $0.24 this time around. With rising interest rates and somewhat challenging economic conditions, investors are less forgiving of red ink on the bottom line.
Still, at current levels, Roku looks like it is worth investing in. At recent prices, its stock was valued at 2.5 times expected revenue for the next 12 months, a fair premium considering its strong position in an industry that has grown by leaps and bounds in the past decade but still has plenty of room to keep growing.
In July, streaming made up 41.4% of total television viewing time in the U.S. While Roku has a streaming channel of its own, its main business is providing access to streaming specialists, not competing with them. As long as viewers spend more time streaming, Roku wins. The U.S. is one of the more saturated streaming markets, but there is still plenty of growth fuel globally.
Roku is the top connected TV platform in North America, and thanks to its network effect, it could retain its lead for a long time. That’s why the company could deliver market-beating returns over the long run.
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Prosper Junior Bakiny has positions in PayPal and Roku. The Motley Fool has positions in and recommends PayPal and Roku. The Motley Fool recommends the following options: short September 2024 $62.50 calls on PayPal. The Motley Fool has a disclosure policy.
2 Beaten-Down Stocks to Buy and Hold was originally published by The Motley Fool
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