2 Growth Stocks Down 33% and 22% That Could Be Long-Term Winners

Is the growth story over? After outpacing broader equities over the past few years, Robinhood Markets (NASDAQ: HOOD) and Spotify Technologies (NYSE: SPOT) seem to have hit a wall. Shares of the former are down 33% this year, while the latter has dropped 22%. Both companies face meaningful challenges, but there are also solid reasons to think they could be great long-term investments. Here's why investors should still consider investing in Robinhood and Spotify.

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Robinhood Markets

Robinhood's shares dropped after its latest earnings report. The sell-off was understandable. While the company posted $1.07 billion in revenue, up 15% year over year, its top-line growth rate declined significantly compared to recent quarters.

HOOD Revenue (Quarterly YoY Growth) data by YCharts

Robinhood's cryptocurrency business was one of the main culprits, as crypto trading revenue dropped 47% year over year during the period. Meanwhile, even after the post-earnings decline, Robinhood's shares are trading at 39.1x forward earnings, well above the 14.4x average for financial stocks.

There could be more downside ahead for the company, especially if it continues to rely on the highly volatile crypto market, an industry where the regulatory landscape is still evolving, something that could pose even more problems. That's what the bears would say, and they have a point. Robinhood will almost certainly be a volatile stock even if it delivers solid long-term returns. It's not a great pick for low-risk investors with little tolerance for big price swings. However, the fintech specialist has some redeeming qualities that may allow it to turn things around after its catastrophic performance this year.

One of Robinhood's strengths is its extensive product ecosystem. The company is best known for helping pioneer commission-free trading on its stock investing app, but it has since transformed into a full-fledged financial services provider. The company is a leading platform for active traders, for instance. It is also explicitly targeting customers who are still relatively new to their financial journeys, another market where it has a strong presence.

This is particularly important as, over the long run, these younger customers will grow their earnings and financial assets, and pour more into various financial services. Robinhood is positioning itself to benefit from this tailwind. As investors rely on the company for more banking and financial products, it could build a strong moat from switching costs. Robinhood's bull case also relies on the company decreasing its exposure to its crypto business by ramping up other opportunities, including its fast-growing prediction markets segment.

The stock remains risky, but if Robinhood can achieve key goals, it could be a market-beater over the next decade. Investors comfortable with significant volatility should consider initiating a position.

Spotify Technologies

Spotify posted strong first-quarter results, but the company's weaker-than-expected guidance sent the stock price down. The music streaming specialist was already struggling this year, partly because of its valuation. Even after the terrible performance it has had over the past 12 months, Spotify is trading at 28.2x forward earnings. The average forward price-to-earnings ratio for communication services stock is 21.4.

Spotify could plunge even more -- and perhaps significantly so -- if it fails to live up to the market's expectations in upcoming quarters. There are also some reasons to be optimistic, though. For example, Spotify's ecosystem continues to expand. It ended the first quarter with 761 million monthly active users (MAUs), up 12% year over year.

Spotify could significantly boost engagement and average revenue per user (which also grew during the period) through various initiatives. For instance, the company has invested heavily in AI to launch features -- such as AI DJ and an AI playlist option available in beta to premium subscribers in some markets -- that encourage users to spend more time on the platform.

Meanwhile, Spotify also sees a large opportunity to grow engagement through long-form podcasts and audiobooks, things people listen to while engaging in other activities. Growing engagement will help boost advertising sales. Further, Spotify benefits from a moat through network effects, as a growing base of artists, record labels, and podcasters attracts even more users, and vice versa. As the company's MAUs expand and it doubles down on various growth avenues, Spotify could improve its financial results and, eventually, its stock price performance. For all those reasons, the stock is still worth considering for long-term investors.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Spotify Technology. The Motley Fool has a disclosure policy.