There’s no question that some of the biggest tech stocks drive change in the world and deserve the attention they get. But when a stock reaches trillion-dollar market cap status, investors might want to start looking for the next big thing.
Roku (ROKU -1.04%), On Holding (ONON 1.68%), and Dutch Bros (BROS 0.47%) each have a market capitalization of less than $10 billion, and they offer incredible growth opportunities.
1. Roku: The ad-based streaming model
Roku is a streaming company with a dual model. It sells streaming devices, but it also offers ad-based streaming content on its many free channels.
The Roku operating system (OS), which refers to its streaming hardware that provides access to a large group of streaming networks, is the top OS in the U.S., Canada, and Mexico, even up against the likes of “Magnificent Seven” member Amazon. It has carved out a wide niche in streaming devices that makes it the company to beat.
However, while this segment is growing, it’s even more useful as a gateway to generating more streaming accounts, which services its much larger advertising business. The ad business, or platform segment, accounted for 87% of total revenue in 2023.
Advertisers are still in the process of moving their business over from traditional broadcast television to streaming. There’s no question that the move will continue since viewers are moving over, and advertisers follow the eyeballs. According to Nielsen, broadcast TV hours fell 16% from last year’s fourth quarter. U.S. adults ages 18-49 spent 60% of viewing hours on streaming, but advertisers spend only 29% of their budgets on streaming.
So while Roku reported a double-digit revenue increase in the 2023 fourth quarter, the important metrics were active accounts, which increased 14% year over year, and viewing hours, which increased 21% year over year. Viewing hours on the Roku channel increased 63%, indicating a wide-open opportunity to capture more ad dollars.
Roku stock is down a whopping 30% in 2024. That decline stems from investors’ disappointment in Roku’s profitability as well as the news that Walmart is acquiring a Roku competitor. Roku’s profitability metrics are improving, and the Walmart deal doesn’t really affect it. This looks like a great opportunity for savvy investors to buy a top growth stock on the dip.
2. On: Developing a loyal following
On Holding aims to be the “most” premium sportswear brand on the planet, and it’s capturing market share in the affluent, resilient community that it serves.
The Swiss company is most known for its CloudTec running shoes, which Hellen Obiri wore to win both the New York and Boston marathons last year, and which customers can’t seem to get enough of these days. But it’s also developing a full line of footwear and activewear for athletes and athlete wannabes.
Growth is strong, and the opportunity is wide open. Sales increased 47% year over year in 2023, or 55% on a currency neutral basis. On works through direct-to-consumer (DTC) and wholesale channels, and DTC is increasing at a faster pace. That indicates loyalty and brand strength.
On targets an upscale population that can pay full price, leading to a higher gross margin and improved profitability. Gross margin increased from 56% in 2022 to 59.6% in 2023, and net income increased 38% over last year. In October, management gave long-term revenue guidance, indicating a 26% compound annual growth rate through 2026 — but it’s now expecting a 30% increase in 2024.
This is still a relatively small company with only $1.9 billion in trailing-12-month sales. But it’s making inroads into areas where it’s still relatively unknown. For example, it has only 9% brand awareness in the U.S., with low brand awareness in cities with large affluent populations, such as 15% brand awareness in Miami and 12% in Dallas.
On is on its way to becoming the next important activewear brand, and now is a great time to buy the stock.
3. Dutch Bros: Expanding across the country
Dutch Bros is reporting high growth as it opens up new stores across the U.S. It now operates in 16 U.S. states, but the drive-though coffee chain has ambitions to reach all regions and introduce Americans everywhere to the cup of coffee already beloved on the West Coast.
The company had 831 stores as of the beginning of the year and plans to open 165 new ones in 2024. This is still a modest store count, but management believes it can reach 4,000 stores over the next few years. This expansion provides it with a long growth runway, but it’s also reporting accelerating comparable sales (comps) growth.
Dutch Bros was enjoying higher comps growth when it first went public in 2021, but it began to slow down and even decline when inflation kicked up. The company responded quickly with price increases to counter the impact of inflation, and as it gains fans for its unique brand of coffee, it’s developing a following. Sales increased 26% year over year in the 2023 fourth quarter, and comps increased by 5%.
This coffee chain is also becoming more reliably profitable. Contribution margin continues to expand, increasing from 24.6% in 2022 to 28.2% in 2023. Full-year net income came in at $10 million after a $19 million loss in 2022, but Dutch Bros reported a $3.8 million loss in the fourth quarter. That’s not incredibly worrisome, as it’s still operating in a harsh environment, and it’s still a young growth company.
These are trends to watch over time, and the lumpy performance indicates a company in flux. That’s what gives investors a compelling opportunity at this stage. Dutch Bros could be a breakout stock this year and an excellent long-term addition to your portfolio.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Roku, and Walmart. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.
