Growth stocks were hit particularly hard in the downturn equity markets experienced last year. Considering the market is far from fully recovered, there are still plenty of growth-oriented companies trading at much lower levels than they were a year ago. But while some of these stocks are worth investing in, others are best left alone, given their questionable prospects. Let’s consider two growth stocks, one in each category: Netflix (NFLX -4.18%) and Cronos Group (CRON -2.58%). Here is why the former is a buy right now, while the latter isn’t worth the trouble.
The stock to buy: Netflix
Last year, Netflix’s stock was battered and bruised as the company faced increasing competition and slower (sometimes non-existent) use growth. But the streaming specialist is doing well this year, with shares up by 24%. The broader market rebound is undoubtedly helping, but the company’s fourth-quarter results helped, too.
Netflix grew its revenue by 1.9% year over year — or 10% in constant currency — to $7.9 billion. Also, the company added 7.66 million new net accounts, bringing its total to 230.75 million, up 4% compared to the year-ago period. Netflix may or may not keep its momentum for the rest of the year, but for long-term investors, there is much to be excited about.
The tech giant has implemented various measures to deal with its headwinds, and there is still plenty of whitespace in the streaming industry. Netflix’s efforts include a low-price ad-supported tier that should attract some viewers while helping boost revenue through advertising. With the recent decline in ad spending, this initiative may not pay off immediately, but it will become a significant source of revenue for the company over the long run.
And to boost revenue growth even further, the company can continue to grow its user base and engagement. Although its nearly 231 million users are impressive, the company is far from having peaked. Linear television, which it is trying to replace, is still alive and well even in its most penetrated market, which is the U.S. Netflix had an 8% share of television viewing time in the country in December, so there is still room for growth.
Netflix will continue to attract users thanks to the name recognition it has built and its content strategy that leans on the massive amount of data on viewer habits that it has access to through its platform, and that allows it to make more movies and shows people enjoy that spread through word-of-mouth. Overall, Netflix sees a $610 billion opportunity through streaming, advertising, and gaming, an industry it has also entered.
That dwarfs the company’s total revenue of nearly $31.6 billion last year. Even acquiring 10% of this opportunity would help catapult Netflix’s revenue to new heights. That’s a solid reason to remain bullish on the stock.
The stock to avoid: Cronos Group
Cronos Group is a Canada-based marijuana grower and retailer. The company has been considered one of the better prospects in the Canadian pot market for years, but like most of its peers, it failed to deliver. Cronos Group generally records unimpressive revenue and an inconsistent bottom line — a poor combination, especially in today’s market.
In the third quarter, Cronos Group’s revenue increased by 3% year over year to $20.9 million. The company reported a net loss of $36.9 million, much worse than the net income of $77.7 million reported in the year-ago period. In fairness, Cronos Group’s unimpressive revenue growth was partly due to a decline in sales in its U.S. segment. U.S. revenue dropped to $514,000, down from $2.1 million. The company’s U.S. segment is undergoing restructuring.
Last year, Cronos Group announced that it would exit the wholesale beauty category in the country, which it entered back in 2019 through its $300 million acquisition of Redwood, a cannabidiol-based skincare products specialist. Still, there is a lesson here for investors.
Cronos Group has been one of the most cash-rich cannabis companies around thanks to a 2019 investment from tobacco giant Altria of 2.4 million Canadian dollars. But the company failed to use these funds to make strategic investments and catapult itself to the top of the cannabis market, as evidenced by Cronos Group’s decision to exit the beauty category to cut costs and reduce operating expenses.
Regulatory challenges in Canada have slowed the expansion of the cannabis industry. And, of course, there remain plenty of legal challenges in the U.S., too, where cannabis remains illegal at the federal level. But Cronos Group has had problems of its own. Perhaps that’s why Altria is giving up the warrants that would have allowed it to acquire more shares of Cronos Group.
The tobacco company is even reevaluating its investment in Cronos Group and could decide to dump shares of the pot grower. That’s just one more reason why it’s a bad time even to consider initiating a position in the Cronos Group.