As an advocate of Roku‘s (NASDAQ: ROKU) media-streaming platform and a long-time investor, I see a bright future for the company. Despite its global potential and solid growth prospects, Roku hasn’t received the recognition it deserves in the market.
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Roku’s Promising Market Position
The impressive selling points for Roku stock are clear. If you are in North America and use video-streaming services, you likely know Roku well. According to Comscore, the company dominates the market, accounting for 49% of video-streaming hours on connected TVs in the region. In contrast, Amazon (NASDAQ: AMZN) holds 16%, and Samsung (OTC: SSNL.F) has 14%. Few brands can compete with these figures.
Roku is reaching 85.5 million active households, many of which own multiple devices. Their user base is expanding at an annual rate of 13%, leading to 15% higher revenues and a remarkable 30% increase in gross profits. This is a telling growth story.
Despite reporting a third-quarter net loss of $9 million, Roku still managed to generate $67.6 million in free cash flow. While the bottom-line earnings may be negative, the company remains a strong cash-generating entity.
Without delving into the details of the Roku Channel, its e-commerce components, the recent collaboration with The Trade Desk (NASDAQ: TTD), or its international growth strategy, it’s important to note that Roku has an ambitious growth plan with numerous potential catalysts. I’m optimistic about Roku’s growth trajectory over the next decade.
Challenges Facing Roku Investors
Simultaneously, some investors are concerned about Roku’s struggles. Average revenue per user (ARPU) has stagnated recently, advertising revenues have declined in light of a downturn in the digital advertising market, and the company’s bottom-line figures remain negative.
These challenges aren’t indicative of a flawed business model. Slower ARPU growth often accompanies international user expansion, the ad market is expected to rebound, and Roku is content with reporting pre-tax losses as long as cash profits remain robust.
Nevertheless, these issues have contributed to a 21% drop in Roku’s stock price over the last year and a steep 60% fall within three years as of December 5. Currently, its shares trade at a price-to-sales ratio of 3.1, comparable to slower-growing value stocks. Even utility companies generally fetch a higher P/S ratio than Roku, despite their limited growth prospects.
Roku’s stock appears undervalued and warrants a higher valuation. Thus, I suggest taking a position today and holding onto it for the long run.
A Cautious Approach to Investing
Despite my confidence in Roku, I wouldn’t invest all my savings in this stock. It comprises only 4% of my retirement portfolio, a figure I find acceptable.
This is not merely about diversification; it’s an acknowledgment that Roku continues to prove itself to a wary market, even as its stock price trends downward. I’ve bought Roku shares several times in recent years and am prepared to wait for a positive market shift before making any new moves.
Recently, Roku’s stock saw a rare uptick after analyst firm Needham suggested it could be an attractive buyout target. While I’m not sure if CEO Anthony Wood would entertain an acquisition offer now, unexpected takeovers can occur.
If a buyout occurs, it could limit shareholder returns to the acquisition price. A stock-based purchase might only replace one stock with another in your portfolio, which doesn’t create lasting wealth.
Keep Roku as a Small Part of Your Portfolio
To clarify, I would consider buying more shares if I hadn’t already established a reasonable position in Roku. However, I prefer to limit my investment in this single stock. If you feel strongly about Roku’s potential for long-term success, you might take a larger position. Just be aware of the risks that come with market fluctuations around this underestimated growth stock.
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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. Anders Bylund has positions in Amazon, Roku, and The Trade Desk. The Motley Fool has positions in and recommends Amazon, Roku, and The Trade Desk. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
