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Down 70% or More, 3 Beaten-Down Growth Stocks You Might Regret Not Buying on the Dip

Motley Fool - Sat Sep 24, 9:00AM CDT

This has been a frustrating year for investors, but at the same time, those with cash to invest have an opportunity to put their money to work in exciting companies at prices that were unimaginable a few years ago.

Browsing a list of growth stocks down more than 70% from their highs, Chewy(NYSE: CHWY), Revolve Group(NYSE: RVLV), and Roblox(NYSE: RBLX) could be incredible values right now. Here's why three Motley Fool contributors believe these stocks will rebound and pay off for investors over the long term.

Chewy: Repeat customers will bring the stock back up

John Ballard (Chewy): Chewy stock has fallen 70% from its all-time high in 2021, yet sales have continued to grow. The company's recurring revenue from customers who have pet food automatically shipped to their door every month gives Chewy a major advantage in the faltering economy.

No matter how weak the economy gets, pet owners have to buy pet food and Chewy makes it easy. In the most recently reported six-month period, Autoship sales totaled 72.6% of Chewy's business, up from 69.8% in the year-ago period. Chewy continues to expand beyond hard goods to services, such as pet insurance and healthcare, which could significantly expand its profit margin, as it already seems to be doing.

In the most recently reported six-month period, profit margin reached 0.8%. That is a healthy jump over the 0.5% in the year-ago quarter, which translates to an 85% year-over-year increase in profit dollars.

Besides expanding into insurance and healthcare, Chewy has several other areas it is investing in to reduce costs and improve margins, such as expanding fulfillment capacity and improving transportation efficiency in moving inventory around the country.

Chewy is building an e-commerce machine. Pet owners love the convenience of keeping their preferred pet food brands on a recurring shipment, and management is leveraging that customer loyalty with ancillary services that should rapidly grow profits and send the stock higher over time. These qualities make Chewy a no-brainer buy in this market.

Revolve: Buy now before this company takes over shopping

Jennifer Saibil (Revolve Group): Much ink has been spilled about how to invest properly when the economy is pressured, which is the current situation. There's a common thread running through many of Wall Street's top takes: Solid companies that are fueling future trends are good bets. Online fashion retailer Revolve Group is one such company that is poised to capture market share and survive during tough times.

Revolve Group is uniquely positioned to thrive in the digital age due to its artificial-intelligence-powered operating systems that are reaching digitally focused shoppers. Technology underlies everything this company does, and the digital focus combines front and back end systems with influencer marketing and quickly changing styles. That's how it's able to take in a very high percentage of sales at full price -- 87% in 2021 -- while other retailers are putting products on sale to balance out too much inventory with curtailed spending.

Sales growth was strong leading up to 2022 after a significant shift to digital shopping due to the pandemic. That has slowed as Revolve comes up against comparisons to last year's robust sales and as the world deals with economic instability. Sales in the second quarter increased 27% over the year-ago period, which was healthy, however, management is expecting that to slow in the third quarter.

Net income was positive in the second quarter, but it declined under pressure from surging costs related to shipping and a higher-than-expected product return rate. Going into 2023, if the economy recovers, Revolve's sales and income should begin to pick up again.

But it's the long-term outlook that's exciting. Even in this environment, active customer count is growing, as is average order value and orders per customer. Revolve has a loyal, active, and growing fan following that is the foundation of its business. As the company continues to connect with its audience and offer it a better shopping experience, Revolve's future looks bright.

Roblox: This metaverse company is selling at a steep discount

Parkev Tatevosian (Roblox): Roblox is one of my favorite beaten-down growth stocks that looks like a buy now. The metaverse pioneer has seen its stock price fall 73% off its high. It thrived at the pandemic's onset as millions of folks flocked to its platform to help pass the time, but as economies have reopened, customer and revenue growth have slowed.

Still, as of its latest update in September, Roblox boasts 59.9 million daily active users and Roblox has done an excellent job extracting revenue from its customers. It does this by selling an in-game currency called Robux that players need for premium items and experiences on the site.

Roblox increased its annual revenue from $325 million in 2018 to $1.9 billion in 2021. That is evidence that players find value in paying for the extra privileges. However, there is a part of Roblox's player base that plays for free. To get revenue from those players, Roblox is implementing several advertising programs.

Sure, Roblox faces headwinds as consumers have more options for what to do with their time and money, but I think the whopping 73% sell-off in the stock price provides an attractive entry point for investors.

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Jennifer Saibil has no position in any of the stocks mentioned. John Ballard has no position in any of the stocks mentioned. Parkev Tatevosian has positions in Roblox Corporation. The Motley Fool has positions in and recommends Chewy, Inc., Revolve Group Inc, and Roblox Corporation. The Motley Fool has a disclosure policy.

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