2 bargain stocks poised for a rally

If you’ve been paying attention to the stock market lately, you might think that Fiverr International (FVRR -1.55%) And Roku (ROKU -7.38%) could be in deep trouble. Their stock price has been on a downward trajectory for the past few years, hitting highs in early 2021 before crashing back down to earth. Roku is currently trading 87% below those lofty highs, and Fiverr’s four-year discount is even deeper, at 93%.

But don’t let the negative price trends fool you; these companies are far from in trouble. The independent services expert and the streaming media technology leader are two of my favorite stock ideas right now.

Increased revenue and cash flow

One of the most compelling reasons to consider Fiverr and Roku as safe bets is their accelerated revenue growth. Both companies experienced a slowdown in revenue during the recent economic turmoil but have since rebounded.

Fiverr has grown its revenue by 125% over the past four years, while Roku has seen a slightly more impressive 135% increase. These numbers indicate that both companies are successfully navigating the challenges of today’s market and are well positioned for continued growth.

Another key factor to consider is the healthy and growing free cash flow (FCF) generated by both companies. During the inflation crisis of 2022, both Fiverr and Roku experienced declines in their FCF. However, they have already recovered and are generating solid FCF again. Fiverr’s FCF currently stands at $90 million, while Roku has generated $427 million in cash profits over the past four quarters. This recovery is a strong indicator of the companies’ financial strength.

FVRR Free Cash Flow data by YCharts.

Convincing valuations

Despite their strong and improving fundamentals, Fiverr and Roku trade at incredibly modest valuations.

You may be wondering what ratios like price-to-sales (P/S) and price-to-free cash flow (P/FCF) actually mean. Think of the price-to-sales ratio as the price you pay for every dollar of sales a company makes. You can calculate this value by dividing a company’s market cap by its sales over the last four quarters. So, for Roku, which has a price-to-sales ratio of 2.44, you’re essentially paying $2.44 for every dollar of sales the company makes. Similarly, Fiverr’s price-to-sales ratio is 2.41, so you’re paying $2.41 for every dollar of sales.

These values ​​are comparable to slow-growth stocks such as discount retailers. TJX Companies (TJX -1.39%) or specialist in maintenance products Clorox (CLX -0.45%)which trade at 2.33 and 2.37 times current sales, respectively. These robust but unexciting companies have seen their sales grow in the single digits over the past five years. Roku and Fiverr have each seen their revenue grow at a compound annual rate of nearly 40% over the same period.

The P/FCF ratio is a bit like the P/S ratio, but it takes into account the company’s free cash flow. This is the money a company has left over after paying its expenses and investments, which can be used for things like investing in new projects.

Roku’s P/FCF ratio is 21.9, meaning you’re paying $21.90 for every dollar of free cash flow the company generates. Fiverr’s P/FCF ratio is even lower, at 10.2, meaning you’re paying just $10.20 for every dollar of its free cash flow. Again, these ratios look good even in the context of classic value stocks. Parent company TJ Maxx and Clorox both have P/FCF ratios just below 30.

These low valuations suggest that the market is undervaluing Roku and Fiverr, especially considering their strong long-term growth prospects. It’s like getting a high-quality product at a bargain price. I could be dreaming of TJ Maxx tonight, but it’s really the same basic idea. If you were shopping around and found a high-end brand-name gadget at a significant discount, you’d probably snap it up. Similarly, investors might see these affordable valuation ratios and realize that Fiverr and Roku are bargains at their current prices.

Thriving in a Stronger Economy

The economy as a whole is starting to recover, and companies like Fiverr and Roku are reaping the benefits. As the economy improves from the inflation crisis that began in 2021, consumers and businesses are likely to increase their spending on digital services and streaming platforms. These are the main offerings of Fiverr and Roku, respectively.

This favorable environment should further boost the company’s revenue and cash flow over the next two years, making its current stock price even more attractive. This is especially true for Roku, which is also benefiting from the recovery in online advertising sales.

The industry has been in a deep black hole due to inflationary storms, because big marketing campaigns make no sense when everyone is holding their wallets in both hands. A freer ad market should be great news for Roku.

The companies I’m watching aren’t just benefiting from the short-term economic recovery; they’re also well-positioned for long-term growth. Fiverr continues to expand its platform, attracting more and more freelancers and businesses looking for digital services. The company hopes to reshape the global digital services market, which is a pretty ambitious goal.

Meanwhile, Roku continues to refine its streaming platform, expand its user base, and capture more ad revenue. These growth drivers should maintain their upward momentum in the years ahead.

In conclusion, Fiverr and Roku are two blue-chip stocks that are poised for a bull run in the second half of 2024 – and well beyond. Despite their falling stock prices, both companies are showing strong revenue growth, healthy free cash flow, low valuations, and the support of an improving economy. Investors looking for undervalued stocks with strong growth potential should consider adding Fiverr and Roku to their portfolios today.