One of the best ways to find success in the stock market is by investing within trends. Long-term megatrends in technology and other sectors have the ability to reshape the economy and create big market winners.

For example, trending sectors like e-commerce, cloud computing, and video streaming led to massive returns in several stocks over the last decade, even with the challenges in the tech sector in the last year. 

While 2023 is potentially shaping up to be a tough year for stocks as most economists expect a recession, that doesn't mean that there won't be any winners.

To find great investments, it's a smart idea to see what's trending right now. Here are two of the biggest megatrends for 2023 and beyond.

1. Platforms vs. point solutions

Behind the scenes, one of the biggest trends in technology is that enterprises are replacing multiple "point solutions" with a single cloud platform.

A point solution is an application that solves a single problem, like accepting payments, authenticating users, or monitoring outages. A platform, on the other hand, gives IT managers a single interface to manage multiple functions, including those provided by individual point solutions.

According to tech research firm Gartner, by 2024, 60% of organizations will have switched from using point solutions to platforms, up from 20% today. As a result, many of the fastest-growing software companies today have positioned themselves as platforms. 

Take GitLab (NASDAQ: GTLB), for example. The company provides a single software platform used to manage DevOps, or the systems through which companies develop and deploy software.

GitLab is growing rapidly, in part because it's grabbing market share from point solutions. Its revenue jumped 74% in the second quarter to $101 million, and it has a large growth opportunity ahead of it from this megatrend, as 85% of its customers are still using two to 10 DevOps point solutions.

Another example is Okta (NASDAQ: OKTA), a leader in cloud identity software. Okta's cloud identity platform integrates with more than 7,000 applications and provides a suite of identity tools including single sign-on and multifactor authentication, so businesses can ensure their customers and employees can log on seamlessly and securely. FedEx is one of many companies that have used Okta's Identity Cloud to replace ad hoc legacy point solutions. In its second quarter, Okta's revenue jumped 43% to $452 million.

Finally, Bill.com (NYSE: BILL) has established itself as an automated end-to-end payments platform for small and medium-sized businesses. It's grown both organically and through acquisitions and helps businesses automate payables, credit card expenses, receivables, and more. Bill.com integrates with accounting software tools and in some cases replaces manual bookkeeping or data entry for its customers. Top-line growth has been strong, with revenue up 94% to $229.9 million.

2. Connected TV

In-home entertainment, the transition from traditional pay TV to video streaming defined the 2010s. This decade, the trend that's shaping up to define it is connected TV, or ad-driven streaming.

With video streaming rapidly replacing linear TV, advertisers are starting to shift ad budgets, and some of the biggest streaming platforms, like Netflix and Disney+, are responding by launching their own ad-based streaming tiers.

Commenting on the decision to launch the ad tier and the audience shift to video streaming, Netflix co-CEO Reed Hastings said on the company's recent earnings call:

What I underappreciated was just the impact on advertisers. They're just being able to reach fewer people. And then the 18-to-49 demographic is even faster than the decline in pay TV. So, this is what is really fueling the cycle is that really collapsed linear TV as an advertising vehicle outside of a few properties like sports.

As eyeballs have shifted to streaming, advertisers naturally want to follow, and that will get easier for them with the Disney+ and Netflix ad tiers. Advertisers also love the connected TV model because it offers both the large-screen, engrossing medium of video with the targeting and tracking of digital channels like social. 

Connected TV is already a fast-growing business for a number of adtech companies, and it could explode next year as Netflix and Disney join the fray.

One such winner of this switch looks to be Roku (NASDAQ: ROKU), the leading streaming platform in the U.S. Though Roku may best be known for its branded dongles that enable streaming, the company makes most of its money through an ad revenue share arrangement with streaming services on its platform. Typically, Roku retains 30% of the ad inventory from its streaming partners and keeps all the revenue it makes from those ads.

Though Roku's revenue growth slowed because of a cyclical decline in ad spending, the growth of the connected TV ecosystem bodes well for it over the long term.

Another company that looks poised to capitalize on the growth of CTV is Magnite (NASDAQ: MGNI), a supply-side adtech platform that rearranged its business to prioritize CTV. In its most recent quarter, CTV revenue rose 29% year over year and now makes up 44% of its revenue, excluding traffic acquisition costs.

The leading demand-side ad tech platform, The Trade Desk (NASDAQ: TTD), also seems well positioned to take advantage of the growth in CTV. Though it doesn't break out CTV revenue, CEO Jeff Green said in the third-quarter results that the CTV market is rapidly growing and is one reason why the company delivered 31% year-over-year revenue growth to $395 million.

Megatrends are worth keeping an eye on

With the rise of these megatrends, there are plenty of ways to profit, and both the transition from point solutions to platforms and the evolution of connected TV look poised to transform their respective industries over the coming years. Companies riding these trends, such as the companies mentioned, are worth keeping an eye on, as they look well-positioned to outperform the market.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Investors have watched the Federal Reserve closely for signs of just how aggressive it will be in tightening its monetary policy to fight inflation. After initially seeing at least a glimmer of hope that the Fed might not move at breakneck speed with ongoing interest rate increases, the news conference that Fed Chair Jerome Powell gave put to rest any ideas of a near-term tempering of the central bank's resolve. The Nasdaq Composite (NASDAQINDEX: ^IXIC) fell sharply after the announcement, falling more than 1% Thursday morning when regular trading opened.

Electric vehicle (EV) pioneer Tesla (NASDAQ: TSLA) has been a big detractor from the market's performance over the past couple of months, finally succumbing to investor fears about the impact of a global economic downturn on the auto manufacturer. Yet while Tesla's declines Thursday morning were relatively mild, Roku (NASDAQ: ROKU) delivered a financial report that investors found more troubling, and that sent its stock sharply lower in premarket trading.

Tesla reports on China

Shares of Tesla moved lower between 1% and 2% in premarket trading on Thursday morning, adding to a nearly 6% decline on Wednesday. The EV company reported monthly sales figures in the key Chinese market, and even though the numbers were impressive, they failed to live up to the lofty expectations that many shareholders have for Tesla.

The latest figures from the China Passenger Car Association showed that Tesla delivered just over 71,700 electric vehicles manufactured at its Chinese Gigafactory facility in Shanghai during October. That was a healthy number, but it was down by 14% from the more than 83,100 EVs that Tesla delivered in September, which set a record for the company.

Tesla investors also have to take into account some other trends that could affect its competitive stance in the world's most populous nation. Despite the encouraging adoption of Tesla vehicles by Chinese consumers, the U.S. automaker still ranks far behind the EV delivery volume of China's BYD, which came in at more than 217,500 cars. Moreover, with factors like China's zero-COVID policy and a general economic slowdown taking shape, Tesla has had to resort to cutting its prices for its mass-market Model 3 and Model Y vehicles. That flies in the face of increases in costs that threaten Tesla's bottom-line growth.

China is an essential market for Tesla to tap, even though it comes with considerable obstacles. Any further pressure in China could make it hard for the stock to recover from its recent declines.

Roku runs into the ad downturn

Shares of Roku fell much more sharply, dropping 15% early Thursday. The streaming TV specialist said its business could take a double hit for the rest of the year, making investors more nervous about its longer-term prospects.

Roku's third-quarter financial report included numbers that indicated ongoing growth in some areas. Revenue was up 12% year over year to $761 million, with streaming hours climbing 21% to 21.9 billion. Roku reported 65.4 million active accounts at the end of September, up by 9 million accounts in the past 12 months. Average revenue per user posted a 10% jump to $44.25.

However, Roku noted that advertising spending on its platform grew at a slower rate than it had expected at the beginning of 2022, citing weakness across the industry. Moreover, with strains on consumer budgets, Roku sees sales of its hardware also coming under pressure. Investors were surprised to see Roku predicting a possible year-over-year sales drop in the fourth quarter.

Investors weren't prepared for that much bad news, explaining the big share-price drop. Yet such moves have been par for the course this earnings season, as shareholders demand near-term profit potential and resiliency against deteriorating macroeconomic conditions.  

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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What happened

Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), the world leader in online advertising, released its third-quarter financial report after the market closed Tuesday, and the results were disappointing. Furthermore, these results were seen as a harbinger of what's to come for the rest of the digital advertising industry.

As a result, many adtech and digital advertising stocks fell in sympathy on Wednesday, as investors considered what was to come. Shares of The Trade Desk (NASDAQ: TTD) and Meta Platforms (NASDAQ: META) slumped as much as 8.1% and 5.5%, respectively, while Amazon (NASDAQ: AMZN) and Roku (NASDAQ: ROKU) had fallen as much as 4.8% and 3.9% respectively. As of 1:59 p.m. ET, the quartet was down 3.9%, 5.1%, 3.9%, and 2.9%, respectively.

This sell-off was broad based, taking down a wide variety of companies that rely on digital advertising for their livelihood. Earlier this year, Google's ad revenue seemed largely immune to the recessionary fears that gripped much of Wall Street. It's well documented that advertising is among the first items in corporate budgets to be slashed in times of economic uncertainty, and it seems that reality has finally caught up with the digital advertising kingpin.

So what

In the third quarter, Alphabet reported revenue of $69.1 billion, which grew just 6% year over year. Foreign currency headwinds played a part, as revenue would have been up 11% in constant currency. For context, revenue in the prior-year quarter grew by 41%.

The pressure on the top line also dented profits, as earnings per share (EPS) of $1.06 declined 24%. Analysts' consensus estimates had called for revenue of $71 billion and EPS of $1.26, so Alphabet failed to clear either bar.      

However, commentary by the company sent investors running for the exits, as management detailed several factors that will weigh on results for the coming quarter. Alphabet cited tough comps, worsening foreign exchange headwinds, and lower ad spending as companies shore up their financial positions in the face of growing economic uncertainty.

As a result of the disappointing results, analysts issued a flurry of price target reductions, with no fewer than 14 of Wall Street's finest cutting their expectations. JMP Securities analyst Andrew Boone seemed to capture the prevailing mood, saying the results were a warning sign that digital advertising this quarter will likely be weaker than originally imagined. 

Bernstein analyst Mark Shmulik echoed those sentiments, writing, "Google is an ad business first, and digital ads [are] no longer a safe place to hide."  

Now what

Alphabet's results seemed to suggest the writing is on the wall for the rest of the digital advertising and adtech space. That said, investors shouldn't be too quick to jump ship but rather assess the potential for each of these companies on their own merit.

Meta Platforms leads the social media space and is widely regarded as the other company in the Google/Facebook duopoly that dominates much of the digital advertising space. Given the similarities in their business models and Meta's reliance on digital advertising for more than 97% of its revenue and all of its profits, the comparison is an appropriate one. After that, however, the contrasts become more pronounced.

Amazon derives the lion's share of its revenue from e-commerce and cloud computing, though in recent years, digital advertising has been one of the company's fastest-growing businesses. Amazon's advertising services revenue grew 20% so far this year but still represents just 7% of the company's total revenue, so the sell-off in this case is likely related to the state of the broader economy and the potential to slow growth in its e-commerce and cloud segments.

Roku is an interesting one. Investors inexorably link the company with its namesake streaming devices, but many are unaware that Roku derives the majority of its revenue from the digital advertising that appears on its streaming video platform. Alphabet said that digital ads on YouTube, the company's streaming platform, declined 2% year over year, the first such decline since Alphabet began reporting the platform's results in 2019. This could spell trouble for Roku in the coming quarters.  

Finally, there's The Trade Desk. The company's adtech platform places digital ads across a wide spectrum of online locations, acting as a go-between for some of the world's largest ad agencies.

When The Trade Desk released its second-quarter report in early August, the results were surprisingly robust. Revenue grew 35% year over year, while adjusted EPS climbed 11%. At the time, CEO Jeff Green made a startling pronouncement, saying (emphasis mine), "This trend also gives us confidence that we will continue to gain market share in any market environment."  

The Trade Desk is seen as a striking alternative to advertising in the walled gardens offered by Google, Facebook, and Amazon. It also has one of the highest valuations, a function of its consistently strong results and entrenched position in the industry. While the stock may yet feel the impact of the economic downturn, The Trade Desk is still my top pick among these digital advertising and adtech stocks. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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After a stellar 2020, Cathie Wood's ARK Invest hasn't done so hot. Shares of the staple ARK Innovation ETF (NYSEMKT: ARKK) are down almost 77% from their all-time highs.

While the firm's results might be changing, its investment strategy isn't. ARK Invest continues to buy innovative growth stocks, and it has become increasingly optimistic about Roku (NASDAQ: ROKU). The streaming platform is ARK's third-largest position across all its ETFs as of this writing.

Why, you might ask? Cathie Wood and ARK Invest have a very optimistic price target on the company of $605 by 2026, which implies a 1,050% return from the stock's current price of roughly $52.60. But is this price target within reach for Roku?

Wood might be overly optimistic...

Many growth investors investing in riskier companies are trying to beat the performance of the S&P 500 Index (SP: .INX), which has returned roughly 11.9% annually since 1957. However, when investors try to "beat the market", many of them anticipate earning only a few more percentage points annually. Therefore, Wood's price target of $605 on Roku might be too outlandish.

This price target reflects more than 1,000% price appreciation over only four years, implying a compound annual growth rate topping 84%. In other words, Wood hopes Roku's share price will jump 84% every year (on average) for the next four years.

While beating the market has been done before, that price target projects some extremely rare price appreciation. For comparison, Apple (NASDAQ: AAPL) has seen returns of roughly 518% over the past decade. While that has handily beaten the market, that's only half of what Wood expects for Roku (over an even shorter period).

This isn't to mention the headwinds facing Roku over the coming year or two. With the challenging economy in the United States right now, Roku has two issues on its hands.

First, consumers are less likely to spend on discretionary goods like televisions right now. Second, the challenging macro environment is causing businesses to pull back ad spending, where Roku makes a lot of its money. Because of this, Roku softened its Q3 revenue guidance, and it now foresees just a 3% year-over-year revenue expansion for the quarter.

Not only that, but Roku's profits fell drastically over the past few quarters. At the beginning of 2022, Roku's trailing-12-month free cash flow was almost $200 million, which has since fallen to a burn of $5 million. The same goes for trailing-12-month net income.

But she might be on to something

While Cathie's price target might be overshooting, there are still reasons to be optimistic about Roku over the long haul. Streaming is picking up drastically, recently overtaking cable TV in terms of usage. According to The Trade Desk (NASDAQ: TTD), connected TV streaming reached 109 million households in the U.S. in 2021, far higher than the 68.5 million cable subscriptions in the U.S. over the same period.

Streaming might be on the rise, but advertisers haven't made the shift yet. Advertisers are predicted to spend just 22% of U.S. TV ad budgets on streaming in 2022, while U.S. consumers ages 18 to 49 spent 50% of TV time streaming in the second quarter of 2022. These figures will likely converge over the long haul as advertisers realize the benefits of advertising on streaming platforms. 

Considering Roku is the leading streaming platform in the U.S., Canada, and Mexico, with over 63 million active accounts, the company looks best positioned to capitalize on this massive opportunity. 

Does the reward equal the risk?

Roku might not be considered a safe stock, but the potential reward for owning the company for the long haul seems to outweigh the risks. Yes, the short term could be painful for Roku as advertisers pull back ad spending and consumers purchase fewer TVs. However, the future is moving toward streaming. As long as Roku remains the leader in this space as streaming picks up, Roku could reap significant benefits over the long haul. 

Additionally, if you're willing to own this stock in a diversified portfolio, you can buy shares now at historically cheap prices. At 2.4 times sales, Roku has not traded around this valuation since coming public in 2017.

With an attractive long-term opportunity ahead and the brand name and scale to benefit, Roku could be a winner, although maybe not as big a winner as Cathie Wood projects. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The fund consists of "a high-conviction portfolio of quality global listed equities from a research driven, bottom-up investment philosophy". It's looking for companies that have predictable earnings, low debt, sustainable competitive advantages, organic growth options and experienced and proven management teams. 

The September 2022 monthly update shows the fund has declined 31.8% over the past 12 months. The biggest detractors to performance were some of the largest and most popular global tech stocks.

Even for those of us who are somewhat numb to just how far these fallen heroes have tumbled, when the numbers are laid bare, you see just how brutal this market has been for a number of large-cap tech stocks.

Block (NYSE: SQ) – down 74%

Roku (NASDAQ: ROKU) – down 80%

Spotify (NYSE: SPOT) – down 57%

Meta Platforms (NASDAQ: META) – down 55%

How the mighty have fallen. 

Yet Hyperion are sticking to their guns, confident in what they believe will be a low-growth inflationary environment, that such an environment is best for their investing style.

Hyperion says that while short-term performance has been unpredictable, and acknowledging it has been a difficult period for investors, the fund believes it has allocated capital to businesses that will produce superior long-term results. 

The top five holdings at the end of September were all large-cap US tech stocks, namely Tesla (NASDAQ: TSLA), Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), ServiceNow (NYSE: NOW) and Airbnb (NASDAQ: ABNB). Combined, they made up over half the Hyperion Global Growth Companies Fund portfolio.

Hyperion went on to say its "global portfolio continues to produce strong short-term financial results which are consistent with the assumptions that underpin our long-term valuations," saying it believes its portfolio "should perform relatively well in an economic downturn".

The Hyperion Global Growth Companies Fund share price has fallen 31.7% over the past 12 months, in line with the underlying performance of the fund.

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Recession fears have weighed heavily on the stock market through the first half of the year. In fact, the broad S&P 500 had its worst first half since 1970, and the Nasdaq Composite is currently 25% off its high, putting the tech-heavy index in bear market territory.

On the bright side, tumbling prices mean that many stocks are now trading at discounts to their historical valuations, and that creates an opportunity for patient investors. Here are two growth stocks worth buying right now.

1. Roku

Roku (NASDAQ: ROKU) helped pioneer the streaming industry. In 2008, it brought the first streaming player to market, not long after Netflix introduced the first streaming service. Today, RokuOS is still the only operating system purpose-built for television, and its viewer-friendly reputation has led to partnerships with a growing number of television manufacturers. That has helped Roku position itself as the most popular streaming platform in the US, Canada, and Mexico.

Meanwhile, Roku has also built a powerful ad tech platform, OneView, which enables advertisers to deliver targeted campaigns across connected TV (CTV), mobile, and desktop devices. That means Roku can monetize advertising whether or not it owns the inventory.

In the first quarter, Roku reported a 14% increase in streaming hours, marking a deceleration in engagement. But that came on the back of a pandemic-driven acceleration in the prior year, when viewing time soared 49%. More importantly, Roku still outpaced the industry average of 10% growth, meaning it gained market share. That led to reasonably strong financial results, as revenue rose 44% to $2.9 billion and cash from operations climbed 18% to $234 million.

Turning to the future, investors have good reason to be bullish. US viewers currently spend 46% of their television time on streaming, but advertisers spend just 18% of their television budgets on streaming. In the coming years, investors should expect more ad dollars to shift to streaming platforms, and Roku is well-positioned to benefit from that trend.

On that note, global television ad spend will reach $344 billion by 2026, according to IMARC Group, and Roku CEO Anthony Wood believes all television advertising will eventually be streamed. That creates a tremendous opportunity for the company.

Shares currently trade at 4.7 times sales, much cheaper than the three-year average of 15.5 times sales. That's why this growth stock is a screaming buy.

2. Block

Block (NYSE: SQ) breaks its business into two segments: Square and Cash App. Through the Square ecosystem, sellers can provision all of the hardware, software, and services they need to run a business across online and offline locations. That differentiates Block from traditional merchant acquirers (e.g. banks), which often bundle products from different vendors, leaving merchants with a patchwork of solutions that must be manually integrated.

The Cash App ecosystem takes a similarly disruptive approach. Consumers can deposit, send, spend, and invest money from a single mobile app, and they can file their taxes for free. Better yet, where banks with physical branches typically pay at least $300 to acquire a new customer, Block pays just $10 to acquire a new Cash App user, making its business model much more efficient.

In short, Block is disrupting the financial services industry for both merchants and consumers, and that has translated into strong financial results. In the past year, gross profit climbed 50% to $4.8 billion and the company generated $965 million in free cash flow, up from a loss of $344 million in the prior year.

Looking ahead, Block is well-positioned to grow its business. The company is working to unlock synergies between Square and Cash App by integrating Afterpay -- its recently acquired "buy now, pay later" (BNPL) platform -- into both ecosystems.

Specifically, Square sellers will be able to accept BNPL online and in person. That should drive sales growth, simply because BNPL tends to boost transaction volume. But those sellers will also be able to use shopper data to deliver targeted recommendations to consumers through the Cash App, which could further boost sales.

Currently, Block puts its addressable market in the U.S. at $190 billion in gross profit, but the company also operates in Canada, Japan, Australia, and the U.K., and it recently entered Ireland, Spain, and France. That means Block has a long runway for growth, and with shares trading at 2.3 times sales -- near the cheapest valuation in the past five years -- now is a great time to buy this growth stock.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Netflix (NASDAQ: NFLX) surprised investors when management shared its plans to start offering an ad-supported tier of the streaming service in the near future. The company has long eschewed the idea of advertisements on its platform, but it's gotten to work quickly as it looks to stem subscriber losses.

Importantly, the company is looking to partner with other companies in order to streamline the operation. "We can be a straight publisher and have other people do all of the fancy ad-matching," co-CEO Reed Hastings said during Netflix's first-quarter earnings call. With the massive popularity of Netflix, those "other people" could have a big opportunity ahead.

Here are four companies that could benefit from Netflix's advertising plans.

1. Alphabet

Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google is an absolute beast when it comes to digital advertising. That said, its premium video advertising experience is limited. While YouTube generated $29 billion in ad revenue for the company last year, Netflix might want more premium advertisements than the standard ad seen next to user-uploaded videos on YouTube. Something more akin to television commercials. 

Google has been pushing into that market. It operates YouTube TV, where it's tasked with filling a couple of minutes of advertising for every hour of programming. It's also worked with Disney since late 2018, serving ads across video, desktop, and mobile.

The real value Google brings to the table is that it has a global user base, just like Netflix. In fact, YouTube is the only streaming service more widely used than Netflix. If the streaming service company wants a simple one-stop shop, Google is it.

2. Comcast

Comcast's (NASDAQ: CMCSA) media subsidiary NBCUniversal is a massive ad seller and a leader in ad technology for television. Its Freewheel ad technology could be the backbone for streaming ads on Netflix, as it already is on its own Peacock platform and several other streaming services. 

Moreover, NBCUniversal already has an ad sales team set up in the U.S. and Europe that could source premium ads for all the inventory coming to Netflix. As such, Netflix might be able to generate the highest revenue per ad impression in those regions by partnering with NBCUniversal.

Despite NBCUniversal's competitive position against Netflix, its ad-tech platform is widely used throughout the media industry. Disney used Freewheel before it switched to Google, for example. So despite the conflict of interest, it's capable of supporting other media companies.

For Netflix to work with NBCUniversal, it may need to find an additional partner or hire some staff in-house for ad sales and integration outside of Europe and the U.S. It's not clear if that's something it's looking to do, but outsourcing could be difficult as The Wall Street Journal reports NBCUniversal is looking for an exclusive contract.

3. Roku

Rumors began swirling that Netflix was interested in buying Roku (NASDAQ: ROKU) earlier this month. That might not be the best investment Netflix could make, and partnering with the connected-TV platform could be a much more reasonable choice. 

Roku could benefit from an ad-supported tier by using it as an opportunity to renegotiate its distribution agreement with Netflix. Roku may look to take a share of the advertising on Netflix, participating in the upside potential of the product instead of taking a flat commission on customers who sign up for the service through its platform. It could also push Netflix to buy ads on its home screen, something it's managed to get Netflix's competitors to do in its negotiations. Disney, for example, often does home-screen takeovers for new Disney+ releases on Roku's platform.

4. The Trade Desk

The Trade Desk (NASDAQ: TTD) offers a demand-side platform that connects media ad buyers with premium connected-TV ad inventory. Netflix could offer excess inventory that it or its partners haven't sold directly through The Trade Desk, enabling it to maintain high-quality ads while keeping a lean advertising sales team. 

The Trade Desk generates revenue by charging ad buyers a percentage of gross spend on its platform. If it has more premium ad inventory to fill via a partnership with Netflix, it ought to be able to increase revenue. Estimates put the amount of annual advertising spend on Netflix in the U.S. and Canada alone at around $2.5 billion. Granted, that likely wouldn't all go through The Trade Desk, depending on Netflix's other ad-tech partners, but a significant chunk could end up coming from its buyers.

Netflix could be a pivotal partner

As Netflix moves toward launching its ad-supported tier, investors will want to pay close attention to which company it partners with, as they could provide a significant boost to revenue over time. While it might take some time for advertising to become a significant part of Netflix's business, the impact could be seen much more quickly for any of the above companies. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The past few months have not been friendly to high-multiple, high-growth tech stocks. Soaring inflation has pushed the Fed to plan to raise interest rates this year, sparking a sell-off into safer assets. Add in the recent geopolitical turmoil, and we have the ingredients for major uncertainty in the stock market. 

Streaming platform Roku (NASDAQ: ROKU) has been severely affected and its stock has been in a downward spiral since last July. Roku's share price has fallen roughly 50% so far in 2022, as overall market pessimism continues hammering the stock. The company is also facing its own set of problems, giving investors lots to think about. 

Should you scoop up discounted shares in this streaming business today? Let's take a closer look.

Roku is dealing with inflation 

Like the rest of the economy, Roku is facing inflationary pressures and supply-chain issues relating to the company's sale of media sticks. While hardware sales only represented 17% of the business in 2021, over the past three quarters, Roku has posted a widening loss -- a negative 28.4% in the most recent quarter on a gross margin basis. Management has decided not to pass on higher component costs to customers. 

Roku's licensed TV partners are also trying to navigate the situation. "Similar to Q3, overall U.S. TV unit sales in Q4 fell below pre-COVID 2019 levels," Anthony Wood, Roku's founder and CEO, highlighted in the shareholder letter. These inventory challenges are clearly hurting sales figures. Since Roku's main objective is to get its operating system into as many households as possible, any headwind to achieving this certainly hurts company performance.  

In 2021, 83% of Roku's overall sales came from its platform segment, which includes high-margin advertising and subscription fees. This is the bread and butter of the business, but even it is struggling in the current economic environment. Organizations that advertise on Roku's platform, particularly in industries like autos and consumer packaged goods, pared back ad spend in the fourth quarter due to their own supply chain disruptions. 

Although Roku increased revenue 33% in Q4 2021, the growth rate missed Wall Street expectations. Furthermore, first-quarter 2022 guidance of 25% year-over-year sales growth disappointed as well. Higher component costs and ongoing supply-chain challenges will continue to negatively affect Roku in the near term, so investors shouldn't be surprised if the player segment's gross margin remains negative in the next few quarters. 

On a positive note, I believe that these issues will prove to be temporary. And the market's pessimism on Roku provides a great buying opportunity for investors. 

The future still looks promising 

If we zoom out and focus on the bigger picture, we'll see that Roku is in a prime position to benefit from the world's transition away from traditional cable TV and toward streaming entertainment. 

Roku is the top streaming platform in the U.S., Canada, and Mexico by hours streamed. In 2021, Roku's 60.1 million active accounts (up 17% year over year) viewed 19.5 billion hours (up 15% year over year) of content. And monetization continues showing strength. Average revenue per user of $41.03 over the trailing 12 months was up 43% compared to the prior-year period.  

There are 1 billion cable-TV subscriptions worldwide, signaling a massive opportunity ahead for Roku. On a micro level, Roku's management cites Nielsen data that shows that the average household in the U.S. watches eight hours of TV per day. And Roku's average active account streams 3.6 hours per day, leaving room for engagement to grow in order to control more TV time. 

And as more TV time goes to streaming, advertising dollars will ultimately follow. According to eMarketer, connected-TV ad spending in the U.S. is forecast to exceed $30 billion in 2025, increasing its share of total digital ad spending. Roku is in an extremely advantageous position to capitalize on this trend. 

Valuation is at a three-year low

Roku's stock is now trading for 5.7 times 2021 revenue. This is the lowest multiple shares have sold for in about three years. The market has completely thrown out Roku with other tech stocks. But this business is a huge leader in the streaming space, and it also has the chance to capture a big chunk of ad dollars that will inevitably flow to connected TV over the next decade. 

With a more attractive valuation today and a long-term thesis that remains intact, Roku's stock looks like a screaming buy right now. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Down 50% in 2022, should you buy this top streaming stock right now? appeared first on The Motley Fool Australia.

But with the dark shadow of inflation looming, which tech businesses are "safe" to return to and which ones should we avoid?

According to Montgomery Investments chief investment officer Roger Montgomery, now is the time to be very selective about where investors park their money.

"Investing in global stocks has been particularly rewarding during 2020 and the early part of 2021. The future, however, could be more challenging and more discernment will be required. This discernment will be no more necessary than required in the tech sector," he said on the company blog.

"The next big rotation could see these over-valued – often profitless – firms dumped in favour of long-duration quality tech businesses."

Short-term volatility is the forecast

Rising inflation changes the whole game, according to Montgomery.

While he believes the world will eventually return to the pre-COVID low inflation environment, the immediate future is not so rosy for tech.

"For the next few months there is every risk that both the leading tech companies and the profitless prosperity companies are put under some pressure," he said.

"Any forthcoming volatility may be greater for the super long-duration tech set where price and sales multiples are off the Richter scale."

Taking advantage of this volatility involves putting money into the right tech shares to reduce downside risk.

Tech giants' numbers are far superior to the speculators

Montgomery thought the COVID winners still have nonsensically high valuations.

"EV [enterprise value]-to-EBITDA sits at about 2500 times for Roku Inc (NASDAQ: ROKU) and 147 times [for] Zoom Video Communications Inc (NASDAQ: ZM)," he said.

"Meanwhile Roku, Docusign Inc (NASDAQ: DOCU) and Slack Technologies Inc (NYSE: WORK) generate negative returns-on-equity."

This is why the safe bet in a rising inflation world are the well-established giants.

"Contrast these multiples to the tech giants whose combination of growth and profitability could not have been imagined by capitalism even a decade ago," said Montgomery.

"Facebook's ROE sits at 25 per cent, Apple's is 82 per cent and Microsoft 43 per cent."

He added that the profitable mega-caps like that trio and Amazon.com Inc (NASDAQ: AMZN) and Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG) have "incredible economics" and "scarcity" on their side.

The rotation away from momentum stocks has already well begun, even though these companies are merely seeing a slowdown in revenue growth.

"Witness, for example, the up-to-50% slides in Peloton Interactive Inc (NASDAQ: PTON) and Afterpay Ltd (ASX: APT), a decline of a third for Docusign and Zoom, along with slides in Appen Ltd (ASX: APX) (down 70%), WiseTech Global Ltd (ASC: WTC) and Xero Limited (ASX: XRO)," Montgomery said.

"We currently believe it is wise to tilt towards quality and away from momentum in the tech names."

Montgomery's worst fear is that inflation pokes up, and then the central banks allow it to go out of control.

"Recently, a well-connected friend told me Australia's [Reserve] Bank believes there's a 25% chance inflation could get away from them," he said.

"The idea that central banks could be 'behind-the-curve' is one markets are most nervous about."

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ARK is a funds management business over in the United States. Ms Wood is its founder, CEO and chief investment officer. ARK has gained its fame through its suite of exchange-traded funds (ETFs), which specialise in high-growth, future-facing and disruptive companies, usually in the tech space. Ms Wood first rose to fame with her uber-bullish views on some prominent tech shares.

Wood drew a lot of eyeballs a couple of years ago with her unabashedly optimistic views on the electric car and vehicle manufacturer Tesla Inc (NASDAQ: TSLA). Back in May 2019, Cathie Wood surprised even the more bullish investors of Tesla when she spruiked a US$5,905 share price target for the company. At the time, Tesla was a US$40 share (adjusted for last year's stock split). It was also just before Tesla went on its millionaire-minting run. Over the following year or two, Tesla was to shoot up more than 1,100% in value. The fact that Ms Wood was one of the first investors to come out of the gates with such a bullish price target for Tesla earned her and Ark a lot of respect in hindsight.

Growth at scale

But since the days of calling Tesla's success, Cathie Wood and ARK also put some pretty convincing runs on the board. Its flagship fund – the ARK Innovation ETF (NYSE: ARKK) – returned an impressive near-40% in 2019, and almost 150% in 2020. ARK Innovation is a fund that incorporates the 'best ARK picks' from its other, more sector-specific ETFs. Between 1 January 2021 and 12 February, it added another ~25% or so. That's enough performance to catch any investors' eye. Other ARK ETFs performed similarly well, if not better, over these time frames. 

But since February 2021, things haven't been entirely 'coming up Milhouse' for ARK funds. The ARKK ETF has corrected sharply since February when it reached its peak of US$159.70 a unit. On today's pricing, ARKK units are back to US$112.28, giving up more than 28% off of that high.

So is ARK a spent force? Let's take a deeper dive.

What's in an ARK ETF?

Here are the top holdings, and their weightings, in the flagship ARKK ETF, as of 27 May:

As you can see, the fund is heavily weighted to high-growth tech shares. We have Tesla (naturally taking out a large chunk at the top there. But we also have companies like Roku, Square, Shopify, Spotify, Zoom and Coinbase.

These companies are all very similar in nature. They are disruptive, tech-based companies that have long growth runways, and a lot of future potential. But they are also not too profitable today, and still very much in 'growth phase'. These companies are at the stage of their lives where they are prioritising revenue growth over profitability. That's why most of them don't even have price-to-earnings (P/E) ratios yet. Or if they do, they are normally in the triple-digits. Take Tesla. Its P/E ratio is currently sitting at 635.7.

What about some other ETFs?

We see similar patterns in some of ARK's other popular ETFs.

Here are the top ten holdings for the ARK Fintech Innovation ETF (NYSE: ARKF) fund:

And here is what the ARK Next Generation Internet ETF (NYSE: ARKW) fund holds:

Again, very similar businesses – high growth, disruptive, priced for future profitability rather than the money they make today.

So why have ARK funds had a bad few months?

And now we can look at the main problem that these funds face. They tend to do well, really well, when the market is running hot, and growth companies are 'in vogue'. By definition, growth companies tend to outperform the broader markets during a bull run and underperform during a bear market. 2019, and post-COVID 2020 were decidedly the former.

But why the underperformance since February 2020? After all, the US S&P 500 Index (INDEXSP: .INX) has gone and pushed to more record highs since 12 February. Most recently on 7 May.

Well, another factor at play has been fears of inflation and rising bond yields, which have spiked in the months since 12 February. According to CNBC, the US 10-year Treasury yield was well under 1% at the start of 2021 and was around 1.18% on 12 February. This yield reached a high of roughly 1.75% in late March and still stands at 1.61% today.

Rising bond yields typically turn sentiment against companies who are being priced on future earnings, rather than what they offer today. In other words, most of the stocks that ARK funds hold. We saw similar gyrations in our own ASX tech sector between February and May.

What does the future hold for ARK?

The big corrections in the value of Ark funds over the past few months might have dented some of the optimism that many of its investors would have been feeling in the months and years prior. But if the market was once again to fall back in love with the kinds of future-facing tech companies that ARK invest in, it is conceivable that we will see ARK funds back at all-time highs. Time will only tell. But Cathie Wood and ARK are probably not going away anytime soon regardless – as barometers of high-octane growth stock investing if nothing else.

The post An ASX guide to Cathie Wood and ARK Invest ETFs appeared first on The Motley Fool Australia.

Holon Global Investments portfolio manager Heath Behnke reckons investing in digital infrastructure, innovative digital products and new payment fintech is the way to "future proof" an investor's holdings.

"People mistakenly think that our products and solutions are tech funds," he told Livewire.

"We don't invest in tech companies. We invest in companies that embrace technology, so we look for great global business models, fueled by innovation."

Next generation of 'mega-caps'

The inclusion of "mega-caps" Google, Amazon, Alibaba Group Holding Ltd (NYSE: BABA) and Tencent Holdings Ltd (HKG: 0700) in a portfolio is "obvious" to Behnke.

"They have a spot in any modern portfolio because their balance sheets are bulletproof."

But he has also highlighted 3 companies that he's tipped to become the next generation of mega-cap companies.

Behnke believes these businesses have huge potential but their prospects can't be analysed with a simple formula.

"The ones that don't 'fit' a PE ratio — like Megaport Ltd (ASX: MP1), Roku Inc (NASDAQ: ROKU) or Tesla Inc (NASDAQ: TSLA) — that have all the hallmarks of exponential growth and are universal in nature."

Megaport shares were up 1.59% on Monday to close at $13.40. The Tesla stock price rose 3.16% on Monday morning Australia time, to finish the trading session at US$589.74.

Roku shares were up 2.05% to close Monday morning at US$315.95.

Sitting on the sidelines is more risky than embracing change

According to Behnke, wealth creation is triggered these days through "innovation and disruptive new business models" — not "embracing safety and the status quo".

"How well did failing to embrace change go for Eastman Kodak Company (NYSE: KODK)?" he said.

"It's critical investors and those who manage investors' money to get comfortable with change."

The fund manager also picked out MicroStrategy Incorporated (NASDAQ: MSTR) as an intriguing buy at the moment.

The software company's core business hasn't been exciting the last few years. But recently it has become famous for investing its cash reserves into  Bitcoin (CRYPTO: BTC).

"NASDAQ-listed MicroStrategy is also a good investment and one of the best Bitcoin proxies for Australian investors," said Behnke.

"With central banks debasing currencies and the risk of rampant inflation increasing, we are strong believers in Bitcoin's value proposition as a store of wealth."

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The pandemic lit a fire under the streaming media sector as people stayed home and streamed more TV shows, movies, and songs. Many of those stocks have already generated big gains for investors this year, but they could surge even higher in 2021 and beyond.

The global video streaming market could grow at a compound annual growth rate (CAGR) of 18.3% between 2019 and 2026, according to Valuates Reports. The global music streaming market could also expand at a CAGR of 17.8% from 2020 to 2027, according to Grand View Research.

Therefore, forward-thinking investors should hold a few promising streaming stocks as that market expands. Here are three solid plays on that secular trend that are still worth buying in 2021: Roku Inc (NASDAQ: ROKU), Netflix Inc (NASDAQ: NFLX), and Spotify Technology (NYSE: SPOT).

1. Roku

Roku is the market leader in connected TV (CTV) devices. It's expected to capture 46.9% of the U.S. CTV market this year, according to eMarketer, thanks to brisk sales of its stand-alone streaming devices and smart TVs. The firm expects Roku's share to surpass 50% by 2022, putting it comfortably ahead of rivals like Amazon.com Inc's Fire TV.

Roku's revenue rose 57% year-over-year in the first nine months of 2020. Sales of its lower-margin players, which generated about 29% of its revenue, grew 40%. Sales from its higher-margin software platform, which generated 71% of its revenue from ads and content distribution partnerships, surged 66%.

During the third quarter, Roku's hardware shipments rose at their fastest rate in over seven years. Its number of active accounts rose 43% year-over-year to 46 million and its average revenue per user (ARPU) grew 20%, but its gross margin contracted as the pandemic throttled its sales of higher-margin ads. 

Roku is unprofitable, and its net loss widened year-over-year in the first nine months. Analysts don't expect it to generate a profit anytime soon, but they expect its revenue to rise 54% this year and another 39% next year.

Roku remains a risky stock, but it isn't terribly expensive at 19 times next year's sales -- especially when tech companies that are generating slower growth are trading at much higher price-to-sales ratios.

2. Netflix

Netflix is the world's largest streaming video platform by paid subscribers. Its total number of paid subscribers grew 23% year-over-year to 195.15 million at the end of the third quarter, as its revenue and earnings rose 25% and 73%, respectively, in the first nine months of 2020. 

Netflix attributes some of that growth to stay-at-home trends throughout the pandemic, but it still expects its revenue and subscribers to both rise another 20% year-over-year in the fourth quarter.

Analysts expect Netflix's revenue and earnings to rise 24% and 52%, respectively, for the full year. Next year, they expect its revenue and earnings to grow another 18% and 44%, respectively -- which are robust growth rates for a stock that trades at 58 times forward earnings. 

Netflix could face tougher competition next year as rivals like Walt Disney Co and AT&T Inc ramp up their streaming efforts. However, Disney and AT&T's streaming platforms aren't profitable like Netflix yet, and Netflix's strong lineup of original content could keep it ahead of the competition.

Moreover, Netflix's latest price hikes (an extra $1 for standard plans and an additional $2 for premium plans in the U.S.) indicate it still enjoys plenty of pricing power against Disney, AT&T, and other challengers. Those strengths all make Netflix a great all-around play on the streaming market.

3. Spotify

Spotify is the world's largest streaming music platform by paid listeners. Its monthly active users (MAUs) grew 29% year-over-year to 320 million last quarter. Its number of paid subscribers rose 27% to 144 million, while its number of ad-supported MAUs grew 31% to 185 million.

Spotify's revenue rose 16% year-over-year in the first nine months of 2020, but high content costs and sluggish ad sales throughout the pandemic throttled its margins and resulted in a net loss.

For the fourth quarter, Spotify expects its revenue to rise 8%-19% year-over-year, its MAUs to increase 11%-27%, and for its gross margin to hold steady. Analysts expect its revenue to rise 41% this year and 22% next year, and for its net loss to narrow next year. 

Spotify's stock more than doubled in 2020, but the stock still looks cheap at five times next year's sales -- likely due to concerns about its lack of profits and competition from tech giants like Apple Inc. 

However, Spotify's stable growth in MAUs and paid listeners indicate there's still plenty of room for multiple streaming music platforms to grow. Its gross margins should expand after the pandemic ends and advertisers ramp up their spending again, while new strategies -- including its recent takeover of the podcast tech company Megaphone and its upcoming expansion into South Korea -- could generate fresh growth. Therefore, Spotify should remain the top "pure play" on the streaming music market for the foreseeable future.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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