With the S&P 500 down 8% in January — and other indices off by even more — there are attractive investment opportunities out there to take advantage of the market’s pessimism today.
I believe Roku (NASDAQ:ROKU) is one such company to consider. The streaming platform’s stock is down nearly 70% over the past six months as investors worry about decelerating revenue growth and supply-chain issues. The Fed’s intention to raise interest rates is also leading to a rotation away from more richly valued stocks.
While these concerns are certainly valid, I still think Roku’s long-term thesis remains fully intact, and smart investors should jump at the chance to buy shares at the current discount. Here’s why Roku is a no-brainer growth stock right now.
Don’t focus on the hardware business
One of the biggest misconceptions that some followers of Roku have is that they still view the company’s hardware segment, which includes sales of media sticks and players, as a key driver of the business. Five years ago, this segment accounted for 73% of total revenue, but in the most recent quarter (ended Sept. 30) it represented just 14%.
This context is important to keep in mind because the hardware business generated negative gross profit in each of the past two quarters, something investors didn’t like seeing. Supply-chain issues are raising input costs for Roku, but management has decided not to pass on price increases to consumers. I think this is the right move. It’s in Roku’s best interest to get customers into its ecosystem even if that means selling its media players at a loss in the near term.
Obviously, with more users, Roku can generate more revenue. That’s because the company’s fast-growing, high-margin platform segment, which includes subscription and advertising revenue, is the real bread and butter. Platform sales jumped 82% in the most recent quarter. And the continued success of The Roku Channel, a big part of this segment, is what shareholders should be focusing on too.
Roku is facing tough comparisons
When the world was essentially shut down and people were stuck at home, unsurprisingly, Roku benefited greatly. In similar fashion to Netflix, there could have definitely been some demand that was pulled forward for Roku in 2020.
On the other hand, 2021 was inevitably going to create a difficult comparison for businesses that saw a surge in demand during the prior year. People were anxious to put down the remote, get out of the house, and continue on living their lives. Even in this environment of heightened consumer mobility, Roku was able to grow active accounts 23% (to 56.4 million) and increase average revenue per user 49% (to $40.10) from Q3 2020 to Q3 2021.
If we zoom out, we’ll see clearly that Roku’s long-term opportunity hasn’t changed. Consumers are increasingly turning to streaming services when it comes to video entertainment, a secular shift that still has a massive runway in the decade ahead. While the streaming industry is close to maturity in the U.S., the rest of the world is still far behind. Roku’s ongoing penetration in places like Europe and Latin America will propel the business as the world continues transitioning from linear TV to streaming entertainment.
Shares sell for an attractive valuation
Since late July, Roku’s stock has come crashing down, losing more than two-thirds of its value. For comparison, the tech-heavy Nasdaq index only dropped 9% during this time. Roku is now trading at a price-to-sales multiple of 7.9, a level it hasn’t been at since the pandemic low of March 2020.
As mentioned above, investors have been souring on expensive growth stocks as a direct result of the Fed’s plan to raise interest rates this year. This encourages a risk-off approach with investors moving to safer assets. Pair this with Roku’s slowing growth, and it’s easy to see why the stock has been so out of favor.
Because the investment case for Roku still looks intact, its current market cap of $20 billion seems like an incredible bargain. Now is the perfect time to go against the rest of the market and scoop up shares of this top streaming stock.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.