2 Growth Stocks Down 40% to Buy Right Now
Key Points
Roku just reached 100 million households on its platform, and this is fueling robust advertising demand.
Spotify is seeing solid subscriptions growth and expanding margins as it launches new AI features.
- 10 stocks we like better than Roku ›
If you're searching for stocks that the market might be overlooking, Roku (NASDAQ: ROKU) and Spotify Technology (NYSE: SPOT) are two promising candidates. These companies enjoy solid competitive positions in digital entertainment and posted solid financial results to start the year.
Here's why I think these discounted growth stocks are worth buying right now.
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1. Roku
Roku commands a strong competitive position in the streaming market with its budget-friendly TV operating system. The stock has roughly doubled over the past 12 months but is still down 74% from its pandemic peak.
The key driver has been continued growth in the number of households on the platform, which is now over 100 million. More households mean more advertising revenue. Roku's platform revenue, including ads, grew 28% year over year in the first quarter.
Roku's affordable platform is becoming a competitive advantage amid rising streaming prices. The Roku Channel offers free ad-supported content and is now the second-most-watched app on the platform. That means Roku's own content is effectively competing with Google's YouTube, Apple TV, Netflix, and other apps available on its platform.
But Roku still benefits from viewers who want to subscribe to any of those services. Not only does it benefit from monetizing those users with advertising, but it also gets a cut of every third-party subscription made on its platform. This boosted subscription revenue by 30% year over year last quarter.
Roku is becoming a valuable distribution platform for the streaming market. The company's total revenue has increased from $3.1 billion in 2022 to $4.7 billion in 2025, and it reported an operating profit of over $100 million in the last year as it starts to benefit from scale.
The stock's valuation is more reasonable, trading at a forward price-to-sales multiple of 3.3. This should set the foundation for compounding returns, as Roku continues to add households and scale profitability.
2. Spotify Technology
Spotify is currently trading 46% off its recent highs. However, the market underestimates the market's extensive listening data from 761 million users and how it can leverage that to drive higher engagement and subscriptions.
Its first-quarter results were solid. Monthly users grew 12% year over year, while a 10% year-over-year increase in subscription revenue helped push total revenue up 8%.
But the real story is improving margins. Over the last three years, Spotify has expanded its trailing-12-month gross margin from 24% to 32%. This is driving solid free cash flow growth, and it's not done yet.
Spotify is taking nearly 20 years of listening data and feeding that into proprietary artificial intelligence models. Its AI DJ has been a popular new feature, with 94 million subscribers using it.
New AI features like Taste Profile and Prompt to Playlist offer a hyper-personalized user experience that should drive more listening sessions. For investors, this can unlock higher margins over time, as these are premium features that could encourage more users to sign up for a subscription.
"We're integrating AI across every part of Spotify, accelerating how we build and deliver at a pace we haven't seen before," Co-CEO Gustav Soderstrom said on the Q1 earnings call.
Importantly, these new features cost very little to produce but have a major impact on user engagement. That's why you're seeing Spotify's gross margin move up. AI is not a competitive advantage, but when you combine it with more data than your competitors, it widens your lead. That's what Spotify is doing, and it's not reflected in the stock price.
Despite years of investment by Apple and others, no music service has been able to catch up to Spotify. Spotify has the greatest reach and years of behavioral data to train its models, providing a deep data moat. This makes the stock a compelling buy on the dip.
Should you buy stock in Roku right now?
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, Netflix, Roku, and Spotify Technology. The Motley Fool has a disclosure policy.
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