Two Growth Stocks Suffering Over 70% Decline, Potentially Poised for Remarkable Recoveries in 2025
Two Growth Stocks Suffering Over 70% Decline, Potentially Poised for Remarkable Recoveries in 2025
The investor who allows themselves to be panicked or excessively concerned by unjustified drops in their investments' value is essentially turning their inherent advantage into a disadvantage. This is according to Benjamin Graham, the pioneer of value investing and an early teacher of Warren Buffett.
In the current context, shares of connected-TV platform company Roku (ROKU -3.08%) and energy drink maker Celsius Holdings (CELH -4.41%) have experienced significant declines. As of now, Roku's stock is 84% lower than its all-time high, while Celsius' stock has dropped by 71%.
Graham's advice to investors is to not let themselves be unduly disturbed by such market fluctuations. Otherwise, they risk sacrificing a crucial edge they hold in the stock market.
So, what is this edge that investors possess and should safeguard? In my perspective, this edge comes from maintaining an impartial outlook despite widespread pessimism in the market. Investors may often be negative, but whether they're correct or not is another matter altogether.
As martial-arts author Bohdi Sanders stated: "When you react, you permit others to control you. When you respond, you are in command."
Given Roku and Celsius' present declines, what should investors do?
Streaming hours
1. Roku: Will advertising demand grow?
23%
Roku earns revenue from the sale of streaming hardware devices and from digital advertising during the viewing of ad-supported content (which is referred to as platform revenue). The concern currently is that the number of streaming hours is increasing at a faster pace than the revenue from advertising.
20%
The table below indicates the trends for Roku in 2024:
20%
| Q1 2024 | Q2 2024 | Q3 2024 || --- | --- | --- || Streaming hours | 23% | 20% | 20% || Platform revenue | 19% | 11% | 15% |
This could mean either that there are fewer and less frequent ads (which seems unlikely) or that Roku is making less revenue per ad. It would be ideal if the company's ad spaces became more valuable due to increased competition to appear in front of its massive audience of nearly 86 million households. However, this possibility hasn't manifested as of late.
Platform revenue
It can be frustrating to witness various key performance indicators for Roku improving while other significant metrics lag behind. I believe these frustrations have contributed to Roku's stock valuation of less than 3 times sales.
19%
Nonetheless, Roku's adoption is still growing, which is a reason to maintain optimism. According to CEO Anthony Wood: "We are confident in our ability to grow Platform revenue in 2025 and beyond as we increase ad demand." If Wood delivers on this promise in the upcoming year, Roku's stock could rebound, as investors' anxieties subside and the valuation subsequently increases.
11%
2. Celsius: Is the decline temporary?
15%
Celsius has moved from market darling to market pariah at an unprecedented pace. This change in sentiment is driven by Celsius' slowing growth rate. After registering revenue growth of 140%, 108%, and 102% in 2021, 2022, and 2023 respectively, its revenue in the first three quarters of 2024 only increased by 5% compared to the same period in 2023.
Matter gets worse: Celsius' revenue in the third quarter of 2024 dropped by 31% year-over-year, which is the first instance of quarterly revenue declining since 2018.
From a price-to-sales (P/S) perspective, Celsius stock is now trading at less than 5 times sales, which is about half of its average valuation for the past 10 years.
A 31% decrease in revenue appears dismal, but it contradicts another metric shared by Celsius' management. According to management, the company is still gaining market share in the energy drink sector. The contradiction has a simple explanation, and it could significantly impact 2025.
PepsiCo distributes Celsius products. In 2024, PepsiCo had too much inventory ordered, and now it's ordering less to sell what it has on hand. In other words, some of Celsius' impressive growth numbers were too high due to the excessive inventory ordered by the distributor. Now, the drop in revenue looks more pronounced to correct the issue.
If this is the entire problem, then Celsius' growth should pick up in 2025 as it overcomes this issue. Once growth figures recover, investors might start believing in this long-term growth story again. The company's profitability has improved in recent years, and it still has various markets to expand into. All of this could help the stock rise.
Investors have largely shied away from Roku and Celsius stocks. They may avoid these two stocks if they allow market sentiment to guide their investment decisions. However, keeping an objective perspective, there is reason to believe that things will improve for Roku and Celsius in 2025. That's why I continue to hold both.
Additionally, I believe the case is stronger and more compelling for Celsius, which is why I might consider adding more shares to my portfolio in the near future.
Despite the significant declines in Roku's and Celsius' stock prices, following Benjamin Graham's advice, investors should not be unduly disturbed by these market fluctuations. Instead, they should maintain their impartial outlook and view this as an opportunity to investigate potential reasons behind the decline, such as decreasing advertising demand for Roku or temporary issues affecting Celsius' growth.
Investors who can see beyond the current market volatility and focus on the fundamentals of these companies might find that their inherent advantage in the stock market remains intact. This could result in profitable opportunities, especially if Roku's ad spaces become more valuable due to increased competition or if Celsius successfully overcomes its inventory-related challenges in 2025.