The U.S. Consumer Price Index, or CPI, a metric used to gauge inflation, rose by 3.5% on a year-over-year basis in March. Since that was the third consecutive month when the CPI grew faster than expected, investors and analysts have become cautious about reaccelerating inflation. This trend could prevent the Federal Reserve from cutting interest rates, which could trigger a significant correction in the stock market.
While investors are now becoming wary of the overall economic outlook, there is money to be made in the market in the long run. Certain growth stocks, especially those powered by AI, could prove to be resilient mainly due to their large addressable markets and solid business models.
Here's why Meta Platforms (META 2.35%) and Roblox (RBLX 5.26%) fit the criteria.
Meta Platforms
The owner of wildly famous social media platforms like Facebook, Instagram, and WhatsApp, Meta Platforms is a dominant force in the digital advertising landscape. Shares of the company soared by 40% so far in 2024 on the back of robust user engagement metrics, effective monetization strategies, and increasing operational efficiencies in the past few quarters. However, there are still several reasons to pick up this stock ahead of the release of its first-quarter fiscal 2024 earnings results (scheduled on April 24, 2024).
First, Meta is estimated to account for a solid 20% share of U.S. digital ad spending and a 75% share of U.S. social network ad spending in 2024. Plus the company's monthly active user count reached 3.98 million at the end of 2023 -- which amounts to almost half of the global population. The company's broad reach and scale make its social media platforms indispensable for the majority of prominent advertisers.
Second, Meta is witnessing increasing daily usage and engagement among young adults in the U.S. This is a highly lucrative trend -- advertisers are keen to reach out to this demographic owing to its high lifetime value. Meta's advertisers will benefit from the increasing purchasing power of these young users over their lifetimes.
Third, Meta is leveraging advanced AI models to improve and personalize its content recommendations, which is helping drive engagement in short-form video content (Reels). The company is also improving ad targeting and performance by using the AI-powered Advantage+ suite, which helps advertisers optimize and automate part or whole of the creation, placement, and audience for their advertising campaigns. Meta is also working to unify its AI-powered recommendation system across its entire video ecosystem to further generate relevant and responsive content for users. All these initiatives are expected to drive up ad conversion rates on Meta's social media platforms.
Finally, analysts also expect strong performance for Meta in the first quarter. Revenue is estimated to grow 26% year-over-year to $36.1 billion, while EPS (earnings per share) is expected to grow 95% year-over-year to $4.29.
Considering the many solid tailwinds and robust financials, Meta seems like a smart pick now.
Roblox
Shares of the gaming company Roblox are down by nearly 20% so far in 2024. Not surprisingly, it is not a favorite AI stock now. But it is important to note that the company's progress in creating interactive and immersive gaming experiences has put it at the forefront of the rapidly evolving metaverse opportunity. Grand View Research expects the metaverse opportunity to grow annually at a compounded average growth rate (CAGR) of 41.6% from $82 billion in 2023 to $936.6 billion in 2030.
Roblox ended 2023 with a 71.5 million large daily active user (DAU) base, of which 15.9 million are paying users. The growth was especially pronounced in the 13-and-over age cohort, which now accounts for almost 58% of the company's DAU base. This trend is promising since older users monetize better and are more attractive to the company's emerging advertising business. The availability of Roblox to the PlayStation and Meta Quest platforms is expected to drive up the size and engagement of its user base even more. Access to multiple platforms will play a key role in enabling the company to expand its user base.
Roblox also saw bookings rise by 25% year-over-year to $1.1 billion, at a much faster pace than the two fixed costs of compensation and infrastructure expenses in the fourth quarter (ending Dec. 31, 2023). This shows that the company has been successful in monetizing its user base while controlling costs.
Although Roblox earns the bulk of its revenue from in-game purchases, it now started focusing on the advertising opportunity. While the advertising business is currently in early stages, the company saw 69 brands engage with the platform in the fourth quarter. The company is gearing up to scale the advertising business in 2024 by building a direct sales force and developing ad performance measurement capabilities.
Roblox is not yet profitable. However, the company is currently trading at 8 times trailing 12-month sales, far lower than the historical average of 14.45. With a well-established user base, multiple monetization avenues, and the possibility of capturing a significant share of the metaverse market, Roblox seems to be an attractive pick, especially at the current relatively low valuation level.
