The Motley Fool
Oct 23, 2024 10:00 PM
Roku (NASDAQ: ROKU) was once one of the best-performing stocks out there. Since the company's initial public offering in September 2017 to July 2021, shares skyrocketed by 1,940%. That gain easily outpaced the broader Nasdaq Composite index by a wide margin.
It's been a totally different story since that all-time record was reached. A combination of slower growth and weaker investor sentiment helps explain why shares currently trade 84% off that peak price.
Nonetheless, here are three reasons you should still consider buying this growth stock right now.
At the industry's peak in 2010, more than 105 million households in the U.S. had a cable TV subscription. That number has come down to approximately 57 million today. The rise of streaming services has changed the media landscape.
Streaming services provide consumers with a better experience that's cheaper than the old model, so it's not surprising to see the decline in cable TV households. The cord-cutting trend is likely to continue in the years ahead, but the pace of cancellations might be slower going forward when compared to previous years.
Roku benefits from this secular tailwind of the rise of streaming entertainment. It provides a single user interface, via its media sticks or smart TVs, for households to combine all of their various streaming services in one location. Growth has been impressive, as Roku's current active account base of 83.6 million is 174% higher than it was just five years ago.
As eyeballs continue to shift to a streaming environment, advertising dollars will follow from linear TV. And this can result in durable revenue growth for Roku.
The streaming industry is still evolving. Therefore, it's hard to say for sure if Roku has a moat. In my opinion, though, it's believable that the company has network effects, or is at least developing them.
At a high level, Roku has three main stakeholders. Almost 84 million active accounts use it to watch shows and movies. There are content companies, like Netflix and Walt Disney, that make their content available on Roku. Advertisers use this platform to target a streaming audience.
With more content being offered, Roku becomes more valuable to its viewing audience. And as engagement increases, more advertisers should turn to the Roku platform to spend marketing dollars.
While there are clues that point to the presence of network effects underpinning Roku's industry position, I also fully understand the counterpoint to the view. There is tremendous competition in the streaming landscape. Roku goes up against deep-pocketed companies like Apple, Amazon, and Alphabet that all have competency in digital advertising and that all offer popular streaming services and distribution platforms.
However, the fact that Roku has carved out top market share in the U.S. among smart-TV operating systems is admirable. And perhaps this points to a durable competitive advantage. Ultimately, time will tell if the business can start to generate consistent and rising profitability in the years ahead.
Roku shares might be up 91% since the start of 2023, but they remain 84% off their peak, which was established in July 2021. There is clearly still hesitation by the market to be fully optimistic about the business.
Consequently, the stock trades for a compelling valuation right now. Investors can buy shares at a price-to-sales ratio of 3. This is 68% below their historical average multiple of 9.4 and yet another reason to consider adding Roku to your portfolio.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Neil Patel and his clients have positions in Walt Disney. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Netflix, Roku, and Walt Disney. The Motley Fool has a disclosure policy.