Roku’s 29% Discount: Your Golden Ticket to Growth

For growth-focused investors, identifying promising opportunities amidst the current market landscape can be challenging. The S&P 500 has surged by a significant 10% since the start of 2024, particularly driven by the strong performance of the high-growth tech sector, building upon last year’s notable gains.

While numerous stocks have rebounded from declines experienced in 2022, Roku (NASDAQ: ROKU) stands out as an exception. Year-to-date, the streaming platform’s stock has plummeted by nearly 30%.

However, it’s important not to be discouraged by Roku’s recent downturn when considering it as a potential investment. Although Roku may lack the established status of industry behemoth Netflix (NASDAQ: NFLX), which currently boasts impressive cash flow and profitability, it remains an enticing business opportunity. Despite reporting consecutive years of net losses, including in 2023, Roku’s long-term growth prospects warrant attention beyond short-term setbacks.

Top 5 Reasons to Invest in Roku Now

1. Discounted Valuation: Roku’s shares are currently trading at less than 3 times sales, significantly lower than Netflix’s P/S ratio of 8.
2. Robust Growth: Roku’s active accounts grew from 60 million in 2021 to 80 million in 2023, accompanied by a revenue increase from $2.7 billion to $3.5 billion, reflecting a strong growth trajectory.
3. Financial Improvement: Roku’s free cash flow surged from $0 in 2021 to $173 million in 2023, demonstrating improving financial health.
4. Market Dominance: Roku holds a dominant market share among streaming devices in North America, positioning it well to capitalize on the growing trend of digital streaming.

Roku’s Resilience in Turbulent Times:

Roku emerged from 2021 with 60 million active accounts and $2.7 billion in annual revenues. Fast forward two years, and the account tally has surged to 80 million, with yearly sales leaping to $3.5 billion. Quite impressive, especially considering the prevailing market challenges fuelled by inflation.

What’s more, the pressure on Roku’s bottom line is easing. In its fourth-quarter report released in February, the company witnessed an upward movement in bottom-line figures for the first time since the autumn of 2021. Concurrently, annual sales experienced an 8% year-over-year increase, while full-year free cash flows solidified at $173 million.

This underscores the effectiveness of Roku’s growth strategy, and I’m eagerly anticipating even more remarkable financial results once the global economy rebounds.

The entertainment landscape is being revolutionized by media-streaming services, with each cord-cutting digital streamer representing a potential Roku customer. Despite fierce competition from tech giants like Samsung, Amazon, and Google, Roku maintains a dominant market share among streaming devices in North America. Moreover, it’s a significant player in Latin America and Western Europe, with plans underway for further global expansion.

Investors shouldn’t overlook the potential of owning Roku stock despite its recent decline.

Here’s why:

Engagement is Strong:

Roku operates on a unique model that is still evolving in terms of monetization strategies. While the company primarily earns revenue from advertising spending, unlike its streaming competitors such as Netflix and Disney+, which rely more on subscription-based models, Roku’s profitability has been challenged due to a decline in digital advertising rates over the past year. However, Roku continues to excel in terms of user engagement. In 2023, streaming hours increased by 20%, surpassing 100 billion hours. The company also gained 10 million active users, bringing its total to 80 million accounts, although this is still significantly lower than Netflix’s 260 million subscribers.

Monetization Challenges Are Temporary:

Although monetizing this expanding user base proved challenging last year, this is likely a short-term obstacle. Taking a broader perspective, there is substantial room for growth as television viewing increasingly shifts away from traditional broadcasting towards streaming platforms. For instance, Roku’s average daily streaming time per user was 4.1 hours in 2023, up from 3.8 hours in 2022. This contrasts with the nearly 8 hours of daily television viewing in the traditional broadcasting realm.

Navigating Roku’s Growth Trajectory:

Roku’s strategy of prioritizing growth over immediate profitability has led to disappointment on Wall Street, particularly as the company struggles to achieve both objectives simultaneously. Operating losses widened to $800 million in the past year, a significant increase from $530 million in 2022. This substantial loss figure may deter some investors from considering Roku as a growth stock.

However, delving deeper than just the headline profit figures reveal promising indicators of an impending earnings turnaround. Despite the widening operating losses, Roku managed to return to positive free cash flow last year. Moreover, management is optimistic about achieving positive earnings on an adjusted basis in 2024, with plans in place to eventually attain positive GAAP results in the future. Executives emphasized this commitment in a recent shareholder letter, stating, “We plan to increase revenue and free cash flow and achieve profitability over time.” These plans suggest that Roku is actively working towards a sustainable and profitable growth trajectory.

Roku’s Future:

For cautious investors, waiting for tangible progress in profitability before considering purchasing Roku stock might be prudent. The upcoming quarters could bring volatility, with sales expected to increase by approximately 12%, as per most analysts. However, if you believe in Roku’s ability to monetize its expanding user base, investing now while pessimism is high could yield significant returns.

Currently, Roku shares are valued at less than three times sales, a stark contrast to Netflix’s price-to-sales ratio of 8. Closing this valuation gap significantly may take several years for Roku. Nevertheless, patient investors may find satisfaction in observing this narrative unfold, provided Roku successfully leverages its growing audience base.

Bottom line:

While the broader market continues to surge, Roku’s stock has faced a notable decline, presenting a unique opportunity for growth-focused investors. Despite its recent challenges and comparisons to established giants like Netflix, Roku’s long-term growth potential, resilient user engagement, and strategic positioning in the streaming market make it a compelling investment prospect. As the company works towards profitability and capitalizes on the global shift towards digital streaming, now may be the opportune moment to consider Roku as part of a diversified investment portfolio.