Media powerhouse Sony (SONY 1.40%) is one of Robinhood's five most popular stocks right now. The long-awaited PlayStation 5 launch put Sony in the spotlight, and many investors are looking for a dramatic rebound in the movie industry after a sharp coronavirus downturn in 2020.
I agree that Sony sounds like a decent investment based on these ideas, but I would also argue that most of the good news has already been accounted for in Sony's surging share price. If you're looking for a long-term winner in the entertainment sector today, you're much better off with media-streaming technology specialist Roku (ROKU 2.72%).
Roku is growing quickly
Roku's stock has doubled over the last 52 weeks, and I still think that it's dramatically undervalued.
The company is not only growing its sales over time, but also accelerating the rate of growth. It's true that Roku rarely reports positive bottom-line earnings, but that's just because management is laser-focused on investing every available penny into even more growth-boosting activities. The sales and marketing budget more than quadrupled over the last three years while R&D budgets tripled. That's the lifeblood of any growth stock worth its salt. The heavy investment in research is particularly important for technology-based businesses like Roku's.
At the same time, Roku has managed to boost its operating cash flows dramatically. That's good news for two reasons. First, it sets the stage for positive free cash flows further down the line, which will let investors and analysts hang their valuation estimates on some solid cash figures. Second, strong operating cash profits will give Roku's management the option to make larger investments in the company's infrastructure. I'm talking about manufacturing facilities, offices for a larger workforce, maybe even some strategic buyouts along the way.
And of course, all of these cash gains are powered by Roku's skyrocketing sales:
Roku is undervalued
Roku's market value will be based on its ability to deliver strong revenue growth until the company decides to shift down its growth-promoting efforts and optimize its profit margins instead. Management doesn't provide quarterly revenue guidance, leaving most investors to face Wall Street's consensus estimates. Those educated guesses have been much too pessimistic throughout Roku's history as a publicly traded company, and the margin of error widened sharply in 2020.
The company's revenue surprises averaged out to 8.4% over the last 13 quarters. The last three reports exceeded analysts' expectations by about 5%, 13%, and 23%, in chronological order. In other words, the consensus analyst estimates around which market makers are building their share price models for Roku are more inaccurate than ever.
There's no doubt in my mind that streaming media services are here to stay. The COVID-19 pandemic accelerated that transition a bit, but it's a long-term trend that was years in the making before the virus reared its ugly head. Roku stands to benefit from that macro trend, no matter which streaming platform attracts the most subscribers around the world. As a leading provider of user-friendly hardware and software for media-streaming purposes, this company benefits from the global growth of a multifaceted entertainment trend.
Roku wins when Netflix (NFLX -0.66%) unveils another award-winning hit show. The company wins when Walt Disney (DIS 2.46%) expands Hulu, Star, and Disney+ to more international markets. It wins when a plethora of smaller companies develop popular streaming services for their local markets in India, Australia, Brazil, or Poland. Tensions and drama between these media-streaming services simply don't matter to Roku and its investors.
We're looking at the early days of a future entertainment industry giant here. The $35 billion market cap you see today should feel quaint when you look back at Roku's growth story from 2030 and beyond. I don't think you can say the same about Sony's $113 billion market cap, which looks less likely to show significant growth over the next decade.