Any stock can fail to keep pace with the market for a few years. However, as time goes, companies with strong businesses tend to set themselves apart and deliver above-average returns over five, 10, or 20 years. That's why investing in beaten-down stocks isn't such a bad idea, provided their underlying businesses have attractive long-term prospects. Investing in such stocks will eventually reward patient investors.
With that backdrop, let's consider two stocks that have significantly trailed the S&P 500 in recent years but still look like solid long-term picks: Roku(NASDAQ: ROKU) and Fiverr(NYSE: FVRR).
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1. Roku
Industry pioneers often end up delivering excellent returns over the long run. Roku is a pioneer in its market, having been one of the first in the connected TV space. Roku leads this industry in North America, where streaming enjoys higher penetration than most other regions. Slowing revenue growth and net recurring losses are responsible for Roku's poor performance in the past few years, but investors should focus on the long-term view, starting with the vast opportunity ahead for the company. Cable is slowly dying.
It's not dead yet, not by a long shot, but the future is in streaming. There are now more than 200 video streaming options. Some focus on movies, others on TV shows, and others on sports. This mode of entertainment is winning against its competitors, and there is still plenty of room to grow. That will benefit Roku, which provides a platform that allows viewers to access most of the largest streaming services. Roku's role as a facilitator here is important.
The company is not exactly in direct competition with Netflix or Hulu -- whichever one rises to the top won't matter too much to Roku so long as its ecosystem of streaming households trends in the right direction. The company has been making a push in international markets in recent quarters, where there is far more white space. True, that's hurting the company's average revenue per user (and its bottom line) since its monetization efforts abroad are still in their early phases.
But give it time. Roku's strategy has worked wonders in North America. Roku's platform segment, which records advertising and content-related revenue, is profitable and generally boasts gross margins in the 50% range. The company's device segment (sales of its namesake streaming player) is not. Roku has, for a long time, sold its streaming device at a loss to ramp up its user base, an important factor in its strategy since its platform unit only gets better the more consumers it has in its ecosystem.
The company's growing streaming households and engagement, coupled with better monetization in international markets where it is still focused on scale, should lead to stronger revenue growth. It will also lead to profits as Roku's platform segment makes up an increasingly large percentage of its bottom line. Roku could ride the streaming wave for years -- or decades -- to come. Don't give up on the stock because of its recent poor performance.
2. Fiverr
Fiverr runs a platform that fits right into the modern gig economy. It helps connect freelancers with companies or, sometimes, individuals seeking their services. Fiverr hasn't performed well this year. In fact, the company has been mostly southbound for the better part of three years as its pandemic-related tailwind stopped. Fiverr's revenue growth slowed considerably, as did the increase in the number of active buyers and sellers on its platform. However, the company has made progress on other fronts.
Fiverr is becoming a more disciplined company, and despite the lower top-line growth, it has managed to cut costs enough to turn a profit in recent quarters.
Further, Fiverr is looking at an attractive long-term opportunity. Its business has recently been profiting from artificial intelligence (AI). Every company sees the benefits of AI for their business. Not every company has the budget to onboard a highly trained AI team. Fiverr provides them with the next best thing, and therein lies the company's strength.
Whether with AI or some other technical field in high demand in the business world, Fiverr offers companies a quick and convenient way to hire experts who can get the job done without having to take them on as full-blown employees, something that would be far more expensive. Many freelancers don't mind: They enjoy the flexibility of their mode of work.
The gig economy is projected to continue growing, providing a tailwind to Fiverr. The company estimates an addressable market worth $247 billion. Its trailing twelve-month revenue of $372.22 million doesn't even scratch 1% of that, so even with competition for the kinds of services it offers, Fiverr should have plenty of room to grow.
Further, the company recently acquired dropshipping specialist AutoDS. The dropshipping industry was worth $285 billion last year and will grow rapidly, hitting $2 trillion by 2033, according to some estimates. So, this buyout meaningfully increases Fiverr's long-term addressable market. For those looking for beaten-down stocks that can pull off a comeback and deliver solid returns over the long run, Fiverr might just be a good option.
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Prosper Junior Bakiny has positions in Roku. The Motley Fool has positions in and recommends Fiverr International, Netflix, and Roku. The Motley Fool has a disclosure policy.
