There's no question that the adoption of streaming video surged during the pandemic, and as the leading aggregator of streaming channels, Roku (ROKU -4.51%) was one of the biggest beneficiaries. The company is the undisputed leader, with more than 56 million active accounts. This, combined with year-over-year revenue growth of 51% in the third quarter, suggests the stock should be a no-brainer.
However, shares of Roku have taken a hit in recent months. The latest earnings report implied that consumers are putting down their remotes and getting off the couch. As a result, Roku's active account growth slowed to 23% year over year and the growth in total streaming hours for the quarter decelerated to 21% over the prior year.
At the same time, there have been a number of positive developments that suggest Roku will regain its footing as we head into 2022. Let's look at three reasons why now is the time to buy Roku stock.
1. A growing content library that's attracting attention
Roku announced in a press release this week that its first original movie, Zoey's Extraordinary Christmas, was the "No. 1 viewed program globally on The Roku Channel during its opening weekend." The movie was also The Roku Channel's most-watched movie premiere ever in Canada. The feature-length film was nominated for a Critics Choice Award in the "best movie made for television" category.
This follows a deeper push into original content for Roku. In January, the company acquired a host of original shows from the now-shuttered Quibi streaming service, adding them to the programming on The Roku Channel. In March, it also bought the rights and the production studio behind the popular home improvement show This Old House, and its companion program, Ask This Old House.
Roku keeps all the advertising revenue derived from The Roku Channel and for programs it owns, which will increase the ad revenue generated on its platform.
2. Roku's bargaining from a position of strength
Roku announced this week that it had reached a multiyear deal with Alphabet's (GOOGL -1.48%) (GOOG -1.53%) Google that will keep YouTube and YouTube TV on its platform.
A spat between the two had reared its ugly head back in April, with Roku accusing the search giant of anti-competitive behavior. The negotiations, which were playing out on the public stage, even attracted the attention of lawmakers who have been hot on the trail of big tech companies including Alphabet, citing their own concerns about monopolistic behavior.
This is just the latest in a series of instances where Roku has played hardball in order to get a more beneficial deal for itself. AT&T's HBO Max was noticeably absent from the platform for more than seven months as Roku worked to extract concessions from its corporate parent, WarnerMedia. Roku also took Fox Corp. to task in January of last year, holding streaming of the Super Bowl hostage and inking a last-minute deal, much to the delight of football fans.
With 56.4 million active accounts, Roku has a lot of sway with the channels that appear on its platform and it negotiates from a position of strength.
3. The world is Roku's next big market
Roku announced this week that it was setting up shop in Amsterdam, bringing the number of international offices to four. The Netherlands joins Denmark, Ukraine, and the United Kingdom on Roku's list of foreign locales. This highlights Roku's ongoing push beyond its unrivaled success in North America.
The streaming provider succeeded by expanding beyond its set-top boxes and dongles, building a smart-TV operating system (OS) from the ground up, which it licenses to TV manufacturers. This state-of-the-art system significantly expanded its reach in North America, as the Roku OS was the No. 1 smart TV operating system in the U.S., with a 38% market share. It produced similar results in Canada, cornering 31% of the market. The company also recently announced it was the No. 1 streaming platform in Mexico.
That has provided the template for its international growth, expanding into the U.K., Brazil, and most recently Germany. The company introduced Roku-branded TVs in each of these countries before expanding further. Other countries in Latin America are now on tap, including Peru and Chile.
More gas in the tank
There's no question that streaming services, including Roku, experienced unprecedented growth during the pandemic. Some investors, however, are taking the deceleration that has occurred in recent months as a sign that growth is over -- but that view is misplaced.
The major pay-tv providers lost roughly 650,000 subscribers in the third quarter, according to data supplied by Leichtman Research Group. More than 3.77 million people have canceled their cable subscriptions so far this year, on top of record-setting defections of more than 5 million in 2020. This illustrates that cord-cutting is alive and well while also suggesting that Roku has a long runway ahead.
With shares currently selling at a 50% discount to 52-week highs, investors can get all of Roku's growth potential at a bargain-basement price.