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3 Reasons to Buy This Cathie Wood Growth Stock, and 1 Reason Not to

By Parkev Tatevosian, CFA – Updated Aug 26, 2021 at 4:40PM

Key Points

  • Cathie Wood's ARK Innovation ETF owns $1.2 billion of this growth stock.
  • This beaten-down growth stock is the third-largest holding in the ARK Innovation ETF.
  • The stock is down 25% in the last month and is trading at a forward price-to-sales ratio of 17.

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This company has great long-term prospects but also faces challenges that could derail growth.

As of this writing, Roku (ROKU 2.81%) is the third-largest holding in Cathie Wood's ARK Innovation ETF portfolio of stocks. The popular asset manager's fund holds over 3.2 million shares of the enabler of streaming content. That's a total value of almost $1.2 billion and makes up 5.4% of the portfolio.

Roku's stock price is down 25% in the last month as the market has turned sour on so-called stay-at-home stocks that benefited during the pandemic. However, that could be a buying opportunity for long-term investors.

Let's look at three reasons to buy this Cathie Wood favorite and one reason for caution. 

Three people sitting on a couch watching television.

Image source: Getty Images.

1. More content is shifting to streaming from linear TV

More and more consumers are switching from linear TV connections to streaming content. Still, there is a long way to go before the transition runs its course. One estimate suggests in 18- to 45-year-olds, only 39% of their TV watching is streaming, highlighting that there is plenty of room for the shift to continue.

2. Roku has a great operating system that customers love

Roku enables this transition by selling hardware (streaming players) that connects TVs to its operating system. Additionally, it works with manufacturers to have its operating system built into TVs. Indeed, Roku is the leading operating system in TVs in the U.S. and Canada, and it's making good progress in Brazil and Mexico. Roku's system is proven to be reliable and reduces costs for manufacturers. Those features have helped Roku attract 55.1 million active accounts, up 28% from last year; a figure that is likely to grow as Roku continues its international expansion.

3. Roku is expanding internationally

The next market Roku will enter is Germany later this year. If Roku can match the success it's achieving in existing markets -- and there is no reason to think it won't -- it can continue to attract new customers. Indeed, the plan from management on international expansion is to keep doing more of the same, since it's working so well. During the second-quarter earnings call earlier this month, founder and CEO Anthony Wood commented:

In terms of growing active accounts globally, the strategy we're using is the same that worked for us well in the U.S., which is to focus on building active accounts, well, in terms of our business model internationally, it's to focus on building active accounts, engaging those users and then monetizing those users. And the way we are building active accounts is through selling our streaming players and licensing our operating system to TV manufacturers and coming to market with Roku TVs. Both of those are working well for us. 

A concern? Roku's valuation is not cheap

The one reason to be hesitant about Roku stock right now is that it isn't cheap, despite falling in value by 25% in the last month. It's trading at a forward price-to-sales ratio of 16.73, down from nearly 25 earlier in the year. To be sure, Roku has excellent long-run prospects. However, that might already be priced into the stock at this price. Furthermore, the company has challenges in the near term, such as the negative effects of economic reopenings and supply chain issues, which are causing shortages in materials and harming profit margins.

All things considered, it may be prudent for investors to wait for an additional pullback in the stock price before accumulating shares in Roku. Or you could wait for supply chain issues and financial impacts from economic reopenings to play out before buying Roku stock.

Parkev Tatevosian owns shares of Roku. The Motley Fool owns shares of and recommends Roku. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Roku Stock Quote
$55.70 (2.81%) $1.52
ARK Innovation ETF Stock Quote
ARK Innovation ETF
$35.15 (1.01%) $0.35

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