Top 3 Growth Stocks to Buy When Markets Are Down

The recent decline in market indices has wiped out half of this year’s gains, S&P500 The index is up 9% for the year. But investors can use the sell-off to get better value in select companies with excellent growth prospects.

Here’s why three Motley Fool contributors think DraftKings (Kid) -0.66%), Lyft (LYFT -3.08%)AND Year (YEAR -0.92%) these are great stocks to buy now.

The dynamics of online sports betting are real

John Ballard (DraftKings): Online sports betting is a $45 billion market that is gradually spreading across the U.S. DraftKings stock has nearly tripled since bottoming out in 2022, but is now 57% off its 52-week high.

The opportunity is huge, but investors should pay attention to why the stock is volatile. First, the business is still not profitable. It generates positive free cash flow, but that was only $51 million over the past year. It will need to grow significantly to justify the stock’s $15 billion market cap.

The second reason the stock is falling is valuation. DraftKings has consistently posted year-over-year growth of over 20% in each quarter, and management is forecasting revenue to grow by about 41% this year. It’s clear that there’s a lot of demand for sports betting and digital gaming services, but no matter what valuation metric you look at, the stock has already built in a lot of growth.

That said, the stock could rebound to new highs as DraftKings improves profitability. It recently announced it would begin charging customers a tax surcharge in select states starting next year. While that could hurt revenue from customers reluctant to pay the additional fee, the company will likely make up for any lost revenue opportunities with improved margins.

Management is targeting adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $900 million to $1 billion for fiscal 2025. Given the company’s EBITDA projections, the stock is reasonably valued for a growth stock and could surprise on the upside over the next few years.

Lyft is ready for real growth

Jeremy Bowman (Lyft): Lyft, the second ridesharing operator Uberparalyzed almost every investor who held shares in the company throughout its history.

It’s now down about 87% from its post-IPO peak, and the stock is near all-time lows after a sell-off prompted by weak guidance in its second-quarter earnings report. While the stock’s chart might have you thinking the company was doomed, it’s quietly turned its business around and is delivering solid growth. It also just reported its first quarterly profit under generally accepted accounting principles (GAAP).

The company has cut costs through layoffs and other operational improvements, and it’s also accelerated growth by improving customer and driver satisfaction. It lets female drivers and passengers choose whether to match with other women, for example, and lets drivers geofence their territory so they don’t get stuck with a long ride they don’t want. It’s also introduced advertising, following in Uber’s footsteps and adding a valuable new revenue stream.

Those efforts have paid off. The company expects ride growth to rise in the mid-teens this year and slightly faster gross bookings growth. It is targeting adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) of 2.1% on gross bookings and expects positive free cash flow this year, or about $300 million.

Those margins should continue to improve, with the stock currently trading at a price-to-earnings ratio of just 11. This looks like a great price for a company that is steadily improving and operates in an industry that seems poised for steady growth.

Rising sales and falling prices mean opportunity

Jennifer Saibil (Year): Roku keeps rising, and its stock keeps falling. When this mismatch occurs, it usually means opportunity. But is it that simple?

Roku is the leading streaming operating system in North America and faces stiff competition from companies like Amazon. It has two business segments: the device segment, which is the devices it sells to enable streaming from a screen or the screens themselves, and the platform segment, which is the advertising it sells as well as sales from third-party deals with other streaming networks. Both of these segments are growing.

But viewership metrics are the heart of Roku’s story. Everyone with a Roku device has an account, and Roku tracks accounts and hours watched. The number of accounts grew 14% year over year to 83.6 million in Q2 2024, and hours streamed increased 20%. These numbers are important to Roku because they show advertisers that there are more people watching, and that means more exposure for advertisers. With more hours, there are also more hours to fill with ads.

Trends continue to trend in Roku’s favor. Viewers continue to shift to streaming, and Roku has the upper hand with its superior operating system. Its free Roku Channel is also gaining popularity, with hours watched for the Roku Channel up 75% year over year in Q2.

So why are the shares falling? Roku is still losing money and doesn’t expect to turn a net profit anytime soon. Gross margin was down year over year in the second quarter, but the operating loss narrowed from $126 million last year to $71 million this year. That’s still a large operating loss, but there were other improvements. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and free cash flow were positive for the fourth consecutive quarter.

Wall Street analysts are predicting that Roku stock will rise an average of 23% over the next 12 months, and as much as 98%. If you’re a risk taker, now is a great time to buy Roku stock.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. Jeremy Bowman has positions in Amazon and Roku. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Roku, and Uber Technologies. The Motley Fool has a disclosure policy.