Streaming platform Roku (NASDAQ:ROKU) has had a tough stretch, sliding more than 50% since hitting its 52-week high in July, and is being questioned by investors over several factors we will talk about below.

The uncertainty has made the stock become a bargain, allowing long-term investors to buy shares in this high-quality business with a chance at great returns moving forward.

Why are investors selling the stock?

Roku benefited from the pandemic as people watched more TV while staying indoors. The company had been growing, but operating metrics accelerated during the height of COVID and are now slowing down in recent quarters.

Quarter User Accounts Year-Over-Year Increase Streaming Hours Year-Over-Year Increase
2019 Q3 32.3M 36% 10.3B 68%
2019 Q4 36.9M 36% 11.7B 60%
2020 Q1 39.8M 37% 13.2B 49%
2020 Q2 43.0M 41% 14.6B 65%
2020 Q3 46.0M 43% 14.8B 54%
2020 Q4 51.2M 39% 17.0B 55%
2021 Q1 53.6M 35% 18.3B 49%
2021 Q2 55.1M 28% 17.4B 19%
2021 Q3 56.4M 23% 18.0B 21%

Data Source: Roku Inc.

This slowdown paints a narrative that Roku is a "pandemic stock" and that growth has peaked for the business. However, isn't it reasonable for the company to catch its breath after the pandemic caused some growth to be pulled forward from the future? We will revisit Roku's growth prospects in a moment.

In addition to growth concerns, Roku's rising control over the eyeballs of streaming audiences has put it at odds with other major technology companies. The company is currently in a dispute with Alphabet, the parent company of YouTube and YouTube TV. The two companies are fighting over terms to support one another, and the stalemate is causing Roku to pull YouTube from its platform on December 9th.

Three people sitting on the couch watching TV.

Image Source: Getty Images

A similar situation could be brewing between Roku and Amazon. Roku users might lose access to Prime Video if the two sides can't work something out when their current contract expires. The willingness of big tech rivals to play hardball with Roku could be part of why investors are now questioning the stock.

Roku's financials remain strong

Despite user growth and engagement slowing some as the pandemic passes, Roku's ability to turn its users into revenue is only getting stronger. In the fourth quarter of 2019, before the pandemic, each Roku user generated $23.14 in revenue, a 29% increase over the prior year. In the third quarter of 2021, each user generated $40.10, a 49% year-over-year increase on top of the pandemic tailwinds in 2020.

Roku's improving ability to make money from its user base is pushing the business in a positive direction that is seeing free cash flow and profits snowball.

ROKU Free Cash Flow Chart

ROKU Free Cash Flow data by YCharts

Roku's balance sheet now has roughly $2 billion in cash as of its 2021 Q3 and gives management a lot of money to continue funding growth efforts.

Tailwinds for growth

Roku's growth comes from three places, including an overall shift of advertising money into streaming platforms, expanding the presence of the Roku platform, and the development of in-house content to make the platform more sticky with its users.

Advertisers continue to spend more on connected TV (CTV) and streaming platforms like Roku, increasing 22% year over year in 2020. Roku has garnered a large share of that spend, where analytics company Pixalate estimates that 49% of all CTV ads go to Roku devices. As money shifts from broadcast television to streaming platforms, Roku could continue benefiting.

Most of Roku's viewership is in the United States, but this is also changing. International markets represent a significant growth opportunity for the company, and investors are looking for signs that the company's platform can succeed in new countries.

According to a study by an analytics group, Roku recently announced that it's currently the top streaming platform in Mexico. The company's TV software is on eight different TV brands in Mexico, showing that its playbook of infiltrating markets by partnering with TV manufacturers to power their smart TVs with software is possible outside of the U.S.

Lastly, Roku has pushed to create original content to bolster the Roku Channel, its free, ad-supported catalog of content for Roku users. It bought the content of failed streaming platform Quibi earlier this year and plans to produce more than 50 original shows over the next two years. Like Netflix did after years of licensing content from other companies, Roku is steadily working to break its dependence on its partners as the battle for ad spending heats up.

A bargain stock

Roku seems like a stronger company than ever when considering these moving parts and its strong financials. However, the stock continues to slide lower. Analyst estimates call for $2.8 billion in revenue in 2021, which values the company at a price-to-sales ratio of 10, a considerable decline from the pandemic when the stock reached a P/S higher than 30.

Roku is facing questions now, but competitive pressures have been around since Roku got started, and the company is arguably better equipped than ever to handle the pressure.

Management has an excellent track record, taking the company from a spunky start-up to a titan in the streaming industry with much larger competitors scrambling to counter Roku's success. If the business continues to execute as it has done, today's price could later prove to be a huge opportunity for investors.

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.