Why Roku Stock Has a Real Tailwind Behind It

When it comes to picking companies that can do great things for your portfolio, there are any number of criteria you can choose. Are they temporarily undervalued? Do they have a massive opportunity ahead? Are they Rule Breakers that are changing their industries, or the whole world?

Well, Motley Fool co-founder David Gardner takes many things into account when he weighs investments, but this week, he's picking a five-stock sampler of companies that are poised for gains because they are riding massive trends. (Special thanks to listener Paul Knaapen, who asked David to chose the five Rule Breakers with the strongest tailwinds.)

In this segment of the Rule Breaker Investing podcast, he talks about one of those five -- streaming video specialist Roku (ROKU 1.58%) -- and explains how this service-agnostic operator will benefit from one of the biggest upheavals in the media world.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 4, 2019.

David Gardner: Stock No. 2. Now, before I present this company name, which starts with the letter R, I just want to speak about the tailwind. Have you noticed that a fair number of streaming services exist today with even more coming online for your entertainment needs? Have you noticed that? There's been a little company called Netflix you might have heard of which has been one of the best stocks you could have owned over the last 15 years and remains a big holding and one that we like a lot even though it's down some in recent months. In part, it's down because of the perception that Disney with its new streaming service Disney+ coming online in November, that Disney pulls content off of Netflix and weakens Netflix's offering and creates more competition. Of course, I like them all. They're all pretty affordable, especially relative to where my cable bill was about five or six years ago. But it's not just about Netflix, HBO, Amazon Prime and Disney+ and Hulu, oh, and also NBC Universal, CBS is coming out with -- you know, The Motley Fool should probably come out with our own streaming content and have a budget. I don't know if we'll actually go there or not. But the point is, everybody and his pal Joey are coming out these days with a streaming service. This company that starts with the letter R, I hope you know of it -- if you're a regular listener or a Rule Breakers member, you may even love this company.

The next one, stock No. 2, is Roku, ticker ROKU, the company name. As we tape, the stock's at about $156 a share. That gives Roku a $17 billion market cap. Now, that market cap is way higher than just a year ago. I picked this stock first for Rule Breakers March 14th of this year, so this is another 2019 pick that I'm sharing with you in this five-stock sampler. The stock was at $61.82 that day. You may have heard me mention just a few seconds ago that it's at $156 today. So, yeah, it's up 145% since March. The market up only 5%. It's rocked the world, Roku, as a stock.

You might be wondering, "You'd buy it now at a $17 billion market cap after it's more than tripled from where it was a year ago?" The answer is yes. When we find winners, we usually hold on to them and we like to add to them when possible. We've been doing so very well. We're looking at the future, not the past. Not where the stock was. We're looking at the future powered by a big tailwind blow. Because the entire entertainment world is in the process of moving to the internet to offer its content. Roku, that little $30 box, is beautifully positioned as an agnostic player, ready to host all of these companies' streaming services. The beauty of the Roku business model is that they make a little bit of money when you buy a Roku box. They could probably even reduce that further and spread the world with even cheaper Roku boxes. But what they've already done has millions of people using Roku as their on-ramp to streaming. Really, this is an advertising play, far more than a $30 hardware purchase. Lots of collecting of data, seeing what you're clicking on, what other people are, serving you up ads that would make sense for you, and, by the way, getting a cut of subscriptions. When people buy something like a subscription, or a one-off purchase off their Roku, they get a sliver of that revenue from the content provider. This is a brilliantly positioned company. There are few bigger tailwinds that I see looking around. That in part explains why Roku has so dramatically appreciated in just the last year. And yet, we're never about one year with our investing at The Motley Fool. I certainly don't spend much time looking backwards with Rule Breaker Investing. It's a volatile stock. I don't know, maybe it'll sell off here and lose a third of its value by January. I have no idea in the short term. But I know one thing: we're going to do well when we find these kinds of companies with big tailwinds, Paul. Buy and hold them. Roku is stock No. 2.