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1 Top Growth Stock to Buy Ahead of a COVID-19 Vaccine

By Daniel Sparks - Nov 29, 2020 at 9:13AM

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A reopening economy could be a major catalyst for this already fast-growing company.

2020 has been a year of investing themes -- both positive and negative. As the coronavirus market crash slammed the market in February, the investing narrative went from greed to fear in a matter of weeks. Stocks from essentially every sector proceeded to plummet. As lockdowns followed suit, companies benefiting from work-from-home trends saw their stocks soar -- and negatively impacted industries like retail and travel suffered.

But as a COVID-19 vaccine nears and a more normal-looking period is potentially on the horizon, what type of companies should investors look to next? How about a company that benefits from both sides of recent narratives -- lockdowns and a reopening economy?

A chart showing three trend lines, with one rising up and to the right faster than the other two

Image source: Getty Images.

Why investors should consider Roku

One extremely well-positioned company going into 2021 -- ahead of a potential vaccine -- is streaming-TV platform Roku ( ROKU 18.23% ). Sure, the company benefited in 2020 from accelerated adoption from consumers as they sheltered at home and turned to streaming TV for entertainment. But the growth potential for Roku is even better when the economy finally reopens. The fast-growing tech company's advertising revenue will likely soar as marketers follow droves of viewers who are shifting from traditional TV to connected TV (CTV).

Illustrating how Roku benefited from lockdowns, the company's active accounts and total streaming hours on its platform increased 41% and 65% year over year, respectively, in Q2 -- a quarter negatively impacted by lockdowns. These growth rates were up from 37% and 49%, respectively, in the prior quarter.

"The replatforming of TV to streaming has accelerated," Roku said in its second-quarter shareholder letter.

The downside from the impact of lockdowns, however, was that Roku-monetized video ad impressions on its platform saw decelerated growth compared to pre-pandemic growth rates. Before the pandemic, Roku ad impressions were growing at rates greater than 100%. When lockdowns hit the economy, this growth rate slowed to 50% as marketers contracted their ad spend. Still, Roku will likely ultimately benefit from lockdowns over the long haul because it accelerated consumer adoption of its platform.

Signaling how the company is well-positioned for a reopening economy, Roku-monetized ad impressions accelerated to a growth rate of 90% in Q3 as some business restrictions were lifted and marketers opened their wallets. Of course, a recent rise in coronavirus cases and more lockdowns recently may put a hold on a further recovery in Roku's ad impression growth rate. Looking ahead, however, a vaccine sometime next year could put the economy back on the road to recovery, serving as a major catalyst for Roku in 2021.

A Roku-powered TV in an apartment living room

A Roku-powered TV. Image source: Roku.

A compelling valuation

"But wait, haven't tech stocks' valuations all been stretched too far?" some readers might be wondering.

Sure, tech stocks have had a great run in 2020, including Roku. But I believe Roku shares are still undervalued. With Roku's platform business (revenue from the company's share of subscriptions, transactions, and ads on its platform) consistently growing at rates of around 70% under normal conditions, these are still very early days for the company. Further, the company's growth opportunity is enormous. Marketers will spend about $60 billion on TV ads in the U.S. this year -- and only $5 billion of this ad spend is expected to occur on CTV. Marketer wallet share will undoubtedly continue shifting away from traditional TV toward CTV.

Given Roku's strong growth in its platform business (70% of the company's total revenue) and its compelling market opportunity, the company could likely average 25% annualized revenue growth over the next 10 years. This would lead to revenue of more than $14 billion in 10 years, potentially translating to billions of dollars of net income.

If Roku can pull this off, the company's $35 billion market capitalization today looks like a compelling price to pay for the leading smart TV platform.

Sure, there's no guarantee this investment works out. Even more, investors should plan for significant volatility in the stock price since the stock's value today is tied heavily to an optimistic forecast for the company's long-term financial performance. But given Roku's ability to grow rapidly and extend its lead over other platforms, a rosy future for Roku seems likely.

 
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.

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