The past few months or so have been a rough stretch for high-growth stocks, particularly those whose businesses experienced accelerated demand as a result of the pandemic. Streaming media juggernaut Roku (ROKU +2.49%) fits perfectly in this category as worries about slowing growth in a reopening economy weigh heavily on the stock.
While it's tempting to take your cue from the broader market and sell shares after the massive price drop, here's why that could be a huge mistake. In fact, now might be an excellent time to consider buying shares of Roku.
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The thesis hasn't changed
I firmly believe the investment case for Roku remains intact. The business will continue to benefit immensely as the world shifts away from traditional cable TV to streaming entertainment. In the most recent quarter, Roku saw revenue grow by 51% and gross profit by 69%. The company's 56.4 million active accounts streamed an incredible 18 billion hours of content during the three-month period.
An increasingly positive development is Roku's push to create more original content; it premiered 23 new titles in the quarter -- and the Roku Channel was a top-five channel on the platform. Meanwhile, advertising is booming too. Not only did the top 10 cable-TV advertisers double their spending on Roku from a year ago, but the company is also now attracting "digitally native" marketers that typically only advertise on social media.
What's more, Roku is making solid progress in international markets. The business launched streaming players in Germany, announced new TV models in Brazil, and will introduce TV models in Chile and Peru later this year. These TV sets have Roku technology already built into them.
Recent wins
Roku won an important victory earlier this month when it reached a multi-year deal with Alphabet (GOOGL 0.75%) to keep YouTube and YouTube TV services on Roku's platform. YouTube TV, which is Alphabet's live TV bundle, was removed from Roku's app store in April over failed negotiations. And heading into December, there were real concerns that YouTube, the second-most visited website in the world, was also going to be taken off Roku.
The financial terms of the deal weren't disclosed, but this is a major win for Roku customers as well as investors (who saw their shares jump 18% on the news). Had Alphabet pulled YouTube and YouTube TV, viewers undoubtedly would have favored other streaming players like Google's own Chromecast or the Amazon Fire Stick. It also helps that regulators were on Roku's side of this battle with Google, citing the power that these big tech giants have.
Roku's powerful competitive position in the streaming market was put on display earlier this year as well when Apple (AAPL 0.96%) signed a deal to have its own button for the Apple TV+ service on Roku's media players. While the iPhone maker offers its own streaming player with the Apple TV product lineup, Apple understands how valuable it is to partner with Roku and take advantage of its wide distribution.
These recent developments with Alphabet and Apple demonstrate just how wide a moat Roku really has.
Take advantage of the market
Since closing at an all-time high of $479.50 on July 26, Roku's shares have fallen a remarkable 45%, aided last month by a Q3 earnings report that missed Wall Street revenue estimates.
I think the pessimism surrounding the stock can be attributed to two key factors. For starters, investors may have soured on pandemic winners that benefited from stay-at-home orders. The belief is that these businesses won't perform as well in a more normalized economy. Roku's Q4 sales guidance of about $892 million was below the Street's expectations of $944 million. As more people put down the remote and take on other leisure and entertainment activities, the worry is that Roku's engagement will fall.
Second, as with many other businesses today, supply chain problems are having a negative impact. In Roku's case, TV manufacturers that carry the company's operating system are facing inventory challenges and higher component costs. "Overall U.S. TV sales in Q3 fell below pre-COVID 2019 levels," founder and CEO Anthony Wood said on the Q3 earnings call. While likely only temporary, it certainly limits the number of households Roku can penetrate in the near term.
For long-term investors, however, I believe it would be a huge financial mistake to sell Roku shares right now. The company's investment merits are still very much in play. You could even view the current market sentiment as a great opportunity to bolster your position.
