Insights

2 Hot Stocks to Buy Right Now

Amid a brutal sell-off in tech stocks this past year, some investors may have come to doubt the value proposition of many of these companies. Many have fallen by more than 75% from recent highs, a fact that may have worsened the selling.

Nonetheless, many tech companies continue to grow at a rapid pace. Such increases could attract investors looking for comparative bargains. These prospective buyers may want to consider the growth tech stocks Roku (NASDAQ: ROKU) and Zscaler (NASDAQ: ZS). Let’s find out a bit more about these two hot stocks.

Image source: Getty Images.

1. Roku

Roku has become the leading platform for streaming in North America. It has accomplished this by attracting content providers, users, and advertisers to its platform. Roku began by offering a primarily neutral platform for streaming services to operate from, and it has retained that neutral reputation despite the ad-supported Roku Channel becoming a top-five app on the platform.

Moreover, Roku attracts users through low-cost hardware and by building its operating system into televisions. That platform has drawn 61 million users as of Q1, compared with fewer than 54 million in the year-ago quarter.

This audience and the operating system’s increasing data-gathering capabilities should help motivate advertisers to utilize the platform. Roku now works with Microsoft to research how ads influence online searches, a move that should expand its edge in advertising. Moreover, it further advanced its advertising platform in May when it launched a shoppable ad platform. Now, consumers can purchase items directly through the OS.

A large audience will likely see such ads, as streaming accounted for 30% of TV viewing time in March, according to Nielsen. Also, viewership continues to transition to streaming, which provides a massive opportunity as the percentage moves closer to 100%.

Still, such potential for success does not come without challenges. Supply chain struggles have hampered the equipment side of the business. Moreover, Roku’s large competitors hold the first-mover advantage outside North America, a potential stumbling block to its international expansion. According to Conviva, Roku claims only 5% of Europe’s streaming market despite a 32% share worldwide.

However, this did not stop revenue from reaching $734 million in Q1, a 28% increase year over year. Moreover, average revenue per user increased to $42.91 on a trailing 12-month basis, a 34% increase over the same period last year and an indication of how well Roku’s ad strategy has worked.

Still, supply chain concerns and rising production costs weighed on financials, and losses reached $26 million versus a $76 million profit in the year-ago quarter.

Admittedly, the stock is down by over 80% from its 52-week high, so you should expect some volatility over the short term. But the price drop has taken its price-to-sales (P/S) ratio to just above four, a level not seen since soon after its IPO. As the transition from TVs to streaming continues, the stock should also stream profits for its investors over the long term.

2. Zscaler

Zscaler may seem like a strange stock choice at first glance. According to Datanyze, it only has a 0.25% share of the software security market. Also, while cloud applications have changed the face of cybersecurity, Zscaler was not the first to address such concerns.

However, Zscaler has led the way in implementing a zero-trust solution that has gained increasing traction. Mordor Intelligence expects the zero-trust security industry to grow at a compound annual rate of 18% through 2026. Additionally, since Zscaler is a cloud-based solution, it requires no on-site infrastructure.

This approach has attracted businesses, including 40% of Fortune 500 companies. Zscaler now says it has 288 customers that pay more than $1 million annually, a 77% increase year over year. An additional 1,891 customers purchase over $100,000 in yearly services from Zscaler.

However, other metrics supporting the company could put off investors. Indeed, in its fiscal third quarter (ended April 30), revenue of $287 million increased 63% year over year. But the net loss of $101 million increased by 73% year over year. A 71% increase in operating expenses contributed to the more considerable loss.

Amid losses and a downturn in tech stocks, Zscaler’s stock price has dropped by almost 60% since November. Also, despite that drop, it still trades at 23 times sales. That makes it considerably more expensive than Palo Alto Networks at 10 times sales and slightly cheaper than CrowdStrike Holdings, which supports a P/S ratio of 25.

Nonetheless, in an increasingly dangerous world, zero-trust security will likely become more critical. Over time, these changing needs should lead to considerable increases in Zscaler’s market share and stock price.

Will Healy has positions in Roku and Zscaler. The Motley Fool has positions in and recommends CrowdStrike Holdings, Inc., Microsoft, Palo Alto Networks, Roku, and Zscaler. The Motley Fool has a disclosure policy.

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