Cheap stocks are popular on Robinhood because they offer an opportunity for massive growth despite often higher risks. But with risk comes reward, and sometimes it pays to take a chance on a potentially undervalued company. Ford Motor (F -0.92%) and Zynga (ZNGA) both trade at under $10 per share. Let's explore the reasons why these stocks could grow significantly over the long term.
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Ford: pivoting to electric vehicles
Ford Motor stock has soared almost 60% over the last six months compared to an S&P 500 return of 21% over the same period. Robinhood investors may love the iconic American automaker because of its popular F-150 truck -- America's top-selling pickup for over 40 years, according to the automotive research group Edmunds. Ford's pivot toward electric vehicles could help power the company's next leg of expansion.
Researchers expect the electric vehicle market to grow at a compound annual growth rate (CAGR) of 21% until 2030 as technological advancements and favorable government policies push electric vehicles further into the mainstream. Ford is leveraging its Mustang brand to market a new all-electric SUV called the Mach-E, which will be "immediately profitable," according to former CEO Jim Hackett.
With a share price of $8.80 at the time of writing, Ford boasts a market cap of $35 billion. The company hasn't turned a profit in the trailing twelve months partially due to coronavirus-related challenges in the second quarter. But the automaker reports around $131 billion in revenue, giving it a price-to-sales (P/S) multiple of 0.27. This valuation is relatively cheap compared to other American automakers like GM, which has a P/S of 0.53, and Tesla, which has a P/S of 17.3. Investors can expect Ford's valuation to potentially improve as its profit-boosting electric vehicle strategy takes shape.
Zynga: an acquisition-driven growth strategy
Young people love video games. According to a recent Nielson report, two-thirds of millenials play monthly. So it's no surprise to see that Zynga is one of the most widely held stocks on Robinhood, considering the real-world popularity of its services. The mobile game developer can bounce back from its weaker-than-expected third-quarter earnings through its aggressive, acquisition-driven expansion strategy.
Zynga's revenue surged 46% to $503 million in the third quarter. And management is guiding for a 41% increase in the fourth quarter for full-year revenue of $1.93 billion and an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $211 million, up 142% year over year. Perhaps surprisingly, the market wasn't satisfied with these results, sending Zynga's stock price down by over 15% since the earnings went live on Nov. 4.
Investors seem to be underestimating Zynga's ability to "roll up" quality assets into its operations. In October, the company completed its partial acquisition of Rollic Games for $180 million, giving Zynga its first foothold in the hyper-casual game market.
Hyper-casual games are mobile games monetized through advertising instead of in-game purchases. And the Rollic acquisition (which gives Zynga access to 65 million additional users for a total of 160 million) could add much-needed diversification to the company's revenue streams. The deal also gives Zynga access to the talented team of developers behind Rollic, which could help boost the company's ability to create valuable intellectual property in the future.
Betting on a recovery
Robinhood investors often bet on downtrodden companies with the potential to bounce back. While this strategy doesn't always work out, Ford Motor and Zynga look poised to buck the trend. Both companies have taken steps to improve their business models and offer the potential for massive returns for investors if things go as planned.
