The S&P 500 (^GSPC -1.54%) had a great run in 2024, rising 25%. But some growth stocks didn't fare as well, even as the underlying businesses continued to grow. Here are two stocks that Wall Street is overlooking that could be ready to advance in the new year.
1. Roku
Roku (ROKU -4.59%) has seen its stock price fall well off its highs over the last three years. Still, the company continues to grow the number of households on its platform at double-digit rates, and management is starting to focus on improving margins, which makes the shares attractive at these lower prices.
Consumers continue to ditch legacy TV in favor of digital media platforms. This is driving consistent growth for Roku. Streaming households, streaming hours, and revenue continue to grow at double-digit rates.
Despite a sluggish consumer spending backdrop in the economy, Roku's ad-supported platform is attracting consumers. The number of streaming households grew 13% year over year to more than 85 million in Q3.
Moreover, Roku users continue to consume more content after joining, with total streaming hours up 20% reaching 32 billion. That means households spent more than four hours daily watching content during the last quarter. This high engagement explains why advertisers continue to invest in Roku. Platform revenue, including revenue from advertising and premium subscriptions, grew 15% year over year to $908 million.
Revenue performance has been solid, but the real reason the stock could head higher in the near term is improving margins. Roku's gross profit margin has improved from 48.1% in Q3 2023 to 54.2% in Q3 2024, and management has multiple levers to push margins even higher.
For example, it sees great potential to further monetize its home screen with new features, create more revenue opportunities through partnerships, and grow the number of subscriptions that are billed through Roku Pay.
Improving margins and continued growth as more ad spending shifts to streaming platforms are huge opportunities for Roku to deliver returns to shareholders.
2. DraftKings
Online sports betting is a compelling megatrend that offers favorable return prospects for long-term investors. The market is expected to reach a value of $24 billion by 2029, according to Statista, and DraftKings (DKNG 2.97%) is in a solid position to benefit.
The stock fell in 2022 with the broader market sell-off, but it skyrocketed over the last two years. In the third quarter, revenue grew 39% year over year, reaching nearly $1.1 billion, and management expects the top line to increase approximately 31% in 2025.
The stock underperformed in 2024, but that means investors are getting better value than a year ago. The stock now trades just over 4 times trailing-12-month revenue, compared to more than 5.6 times sales last year.
One catalyst for the stock is improving profitability. Management's guidance calls for free cash flow to reach roughly $850 million in 2025. DraftKings has made tremendous progress growing this key measure of profitability over the last two years, which indicates the potential for higher margins over the long term as the company wins more customers.
Sports betting is currently legal in 38 states, but two of the most populous states -- Texas and California -- have yet to legalize online sports betting. These states have a lot of sports fans and could provide a long tailwind of growth for DraftKings.
The growth of sports betting megatrend could produce market-beating returns over the next five years and beyond. The recent dip is a great opportunity to add DraftKings stock to a well-diversified growth portfolio.
