A stock's long-term journey is never a straight line higher or lower. There are bound to be jumps and dips in the road along the way. Streaming platform Roku (ROKU 1.59%) is hitting some bumps, down 35% from its all-time high after being one of the darlings of the stock market in 2020.
Some short-term noise and concerns have recently emerged, and investors are souring on the stock. Let's look deeper into this situation and determine whether Roku's dip is an opportunity to buy or a sign of things to come.
The noise around Roku
Roku was trading at its all-time high as recently as late July, but several events sparked the ensuing sell-off.
First, the company reported its second quarter earnings on Aug. 4, and the total hours Roku customers spent streaming declined sequentially from the previous quarter, dropping 5% from 18.3 billion hours to 17.4 billion. Meanwhile, the number of active accounts grew to 55.1 million, but the 28% year-over-year increase was the lowest level since Roku went public in 2017.
Management spoke during the earnings call about tough comparables from 2020, a common theme among many "COVID stocks" that originally surged in the early months of the pandemic. Additionally, management suspected consumers are enjoying non-television entertainment as lockdown restrictions have loosened up over the course of 2021.
And most recently, there has been chatter regarding competitive pressure from big-tech players such as Alphabet and Amazon. The former announced a partnership with television manufacturer TCL to release smart-TVs running Google TV software, encroaching on Roku's turf. Amazon is also copying Roku's playbook of providing the TV operating system, announcing its intention to sell Amazon-branded smart TVs with Alexa built into them.
Why Roku's growth prospects remain promising
While bearish sentiment has gotten louder lately, concerns around competitive threats have been a narrative for years now, despite Roku's ability to grow in spite of them. The company's industry-leading user base has made it a stronger player in the ad-tech business, which is grouped into the platform segment that made up over 80% of Roku's total revenue in the second quarter.
According to Pixalate, approximately 49% of all global programmatic ads, the type of ads you see on streaming platforms, were on Roku devices as of the third quarter of 2020. It's estimated that programmatic ad spending will nearly triple from $3.2 billion in 2019 to $8.7 billion in 2022, a clear upward trend that is likely to last well beyond next year.
Roku's strong share of this ad spend, combined with its user growth, shows up in its operating results. Its platform segment revenue grew 117% year over year to $532.3 million in the latest quarter.
The company is expanding internationally to replicate its success outside of the United States too. It has begun selling streaming devices in the U.K., Ireland, and France and announced Germany as its next market. Roku is doing the same in Latin America with devices being sold in 12 countries across the region.
Roku will aim to follow the same strategy it developed at home: build a large user base by penetrating new markets with its streaming devices before monetizing those users. Could Amazon or Alphabet disrupt Roku's efforts in international markets? Of course. But the company has been near flawless in its execution over the past several years, which should earn it some patience among investors as the company carries out its strategy.
Is Roku a buy?
Roku boasts a $42.5 billion market cap as of this writing, and the company is expected to generate $2.8 billion in revenue this year, resulting in a forward price-to-sales ratio of 15. This is a noticeable contraction in Roku's valuation multiple, as shares sold for over 25 times sales at the end of 2020.
For years, Roku has been the underdog fighting off some of the biggest companies in the world on its way to amassing a 49% market share of programmatic ads for streaming television. In that light, it's hard not to give the company the benefit of the doubt, which makes this latest sell-off a buying opportunity worth considering.