Most of the time, Wall Street gets it right. That is to say, the market usually knows what's important to know about a company, and appropriately reflects this information in that stock's price. These values, of course, can and do change every day. However, these changes mostly reflect new information or new perceptions regarding a stock's risks.
Every now and then, though, Wall Street -- analysts and investors alike -- can miss the mark. More to the point, "the Street" doesn't fully see a company's potential and therefore undervalues that company's shares. This creates opportunities for astute investors that see the bigger picture.
With that as the backdrop, here's a closer look at three great growth stocks that Wall Street might be sleeping on, but I'm not.
1. Roblox
It hasn't been an easy past few weeks for Roblox(NYSE: RBLX) shareholders. The stock tumbled early last month, mostly in response to disappointing guidance for the fiscal quarter now underway. Namely, the video gaming platform's expectation for second-quarter bookings of between $870 million and $900 million was below estimates; the company also lowered its full-year guidance. Thanks to that single day's sell-off, the stock is now down 27% from February's high. That's despite the slight rebound since the post-earnings pullback. Investors are worried about what looks like a slowdown stemming from economic weakness.
However, this doubt misses a couple of important realities regarding Roblox.
First, although the company's internal outlook wasn't quite up to external expectations, Roblox is still doing incredibly well. Last quarter's top line was up 22% year over year, beating analysts' consensus figure. It's still in the red as well, but last quarter's loss was also less than expected. Sure, revenue and bookings growth is anticipated to slow down for the remainder of this year and the next. Based on its recent past, however, it's arguable the company's near-term future will be brighter than currently believed.
Second, while its roots are in the online video-gaming arena, Roblox is branching out. Last month, it widened the test launch of its in-game advertising platform, which shows paid-for billboards within the virtual worlds its users visit. These ads can even directly generate a real-world sale of a good or service. At the same time, the company's tech can create virtual worlds for brands that want to offer an immersive metaverse experience for existing and prospective customers. Nike, Walmart, and the beauty brand Fenty are just some of the names that are now engaging consumers through Roblox's platform.
Given Precedence Research's prediction that the metaverse market is set to grow at an annualized clip of 38% through 2033, Roblox shareholders have much to look forward to. It's just going to take some time for all of its upside to be fully realized.
2. Ulta Beauty
These are tricky times for cosmetics and beauty-supply retailers. Department stores and general merchandise stores, once the industry's top destination for these goods, are losing their share of total foot traffic. Consumers are also more willing to try new, less mainstream brands and venues than they've been using in the past, which they're often finding online. These brands are also willing and able to sell directly to customers, bypassing retailers as middlemen altogether.
Ulta Beauty(NASDAQ: ULTA) has seemingly defied if not outright benefited from the industry's evolution, however.
If you're not familiar with it, $20 billion makeup and beauty retailer Ulta does on the order of $12 billion worth of business per year, combining a strong online and offline presence. There are nearly 1,400 stores encompassing 14.6 million square feet worth of shopping space peppered all across the United States. The retailer handles a wide range of brand names, including Clinique, e.l.f., Mad Hippie, and Fur, just to name a few. Being able to offer this deep mix of goods and brands is a key reason it's done so well in a challenging environment; Ulta is the chief disruptor because it delivers consumers what they want, the way they want it -- a wide selection and convenient shopping options at a fair price.
Admittedly, Ulta Beauty stretches the definition of what's considered a growth stock. Its top-line growth is projected to remain in the single digits for at least the next several years. Chalk it up to the highly saturated market. The company underscored this competitive concern just a few days ago, too, by dialing back its full-year revenue outlook from a range of $11.7 billion to $11.8 billion to a lower range of only $11.5 billion to $11.6 billion, ultimately pointing to the toll that the aforementioned economic malaise is taking on consumer spending. Even its competitive edge isn't quite enough right now.
This headwind was already factored into the stock's price, though. Ulta Beauty's shares are now 30% below March's high, 20% below analysts' consensus price target of $495.06, and trading at only around 15 times this year's expected per-share earnings of between $25.20 and $26.00. That's a bargain price, no matter how you look at it.
3. Alibaba
Last but not least, add China's e-commerce powerhouse Alibaba(NYSE: BABA) to your list of growth stocks that Wall Street just isn't giving its due respect.
Anyone keeping tabs on Alibaba (parent to e-commerce platforms Taobao and Tmall) likely knows the past few years have been miserable ones for stockholders. Although it obviously benefited from the onset of the COVID-19 pandemic, the stock's price peaked in late 2020. Beijing began a sweeping regulatory crackdown in mid-2021, which didn't ease until the middle of this year. Even then, China's heavy-handed pandemic-prompted lockdowns held in place through late 2022 ended up doing more lingering damage to its economy than was foreseen.
In the meantime, the company itself seems to be struggling with self-management. Just since November, Alibaba has canceled its once-touted plans to spin off its cloud computing business as well as its logistics arm. The surprising plan reversals are a key reason shares haven't budged since the middle of 2022, and are still down 75% from their 2020 high.
Take a step back and look at the bigger picture, though. Things are getting better.
Take China's economy as an example. Challenges aside, the International Monetary Fund still contends that the country's GDP is going to grow by 5% this year. Consumer spending is healthy there, too. Beijing reports a 2.3% year-over-year improvement in April's retail sales. While that's not huge, any improvement on the April 2023 growth rate of 18.4% is impressive. Alibaba's Tmall and Taobao are particularly well positioned to capture more than their fair share of this spending growth. Mordor Intelligence says China's e-commerce market is set to grow at an annualized rate of more than 11% through 2029.
The company still has much to figure out, like which businesses it wants to be in and which ones it doesn't. Although it's sticking with its cloud computing and logistics operations right now, Alibaba is still restructuring, including replacing several key members of its management team. It's very much a work in progress.
The progress it's making is actually progressive, though, taking care of matters and refocusing the company in a way that remains underestimated by most investors. This is the overhaul that should have been underway prior to the pandemic.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike, Roblox, Ulta Beauty, Walmart, and e.l.f. Beauty. The Motley Fool recommends Alibaba Group and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
