Popular investment manager Cathie Wood's ARK Innovation ETF (ARKK -1.60%) had several stocks that performed poorly last year.
Indeed, the second-largest holding in that ETF's portfolio, Roku (ROKU -1.34%), fell by 31% in 2021. But that's partly why it's one of my favorite Wood stocks to buy now.
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Accelerating revenue growth
The one better thing than robust revenue growth is accelerating robust revenue growth, and that's precisely what Roku has been delivering since 2015. Its top line increased from $320 million in 2015 to $1.8 billion in 2020. What's more, its revenue growth rate has increased every year since 2016.
Roku generates some of its revenues from selling physical streaming-video hardware that connects to TVs and gives people access to the Roku platform, through which they can sign up for and watch various streaming services.
It's the platform segment that provides the bulk of Roku's revenue and profits. The company takes a percentage of all sales conducted on its platform. Sign up for Netflix on Roku -- it takes a piece. Sign up for Disney+ on Roku -- it takes another piece. Those two services, of course, are ad-free. With streaming services that are supported by commercials, Roku receives a share of the revenue generated by showing advertisements to viewers on its platform. In some ways, Roku is similar to Apple's App Store in terms of how it earns money from activity in its ecosystem.
In the first nine months of 2021, Roku's platform segment revenue totaled $1.58 billion, and gross profit from the segment totaled $1.04 billion. Compare that to the player segment, which earned revenue of $320 million and booked a gross loss of $6.5 million.
These figures are likely to increase as consumers prefer streaming content versus traditional cable TV. According to the results from YouGov's fourth Future of TV survey, nearly half of U.S. TV viewers are already watching without cable subscriptions, and 44% of those who still have cable TV anticipate they will cancel or reduce their cable services in the coming year.
An underlying driver of this shift is the significant convenience advantage for streaming content. Signing up for a new streaming service takes far less time and effort than subscribing to cable TV, which requires professional installation. Further, streaming services can be viewed anywhere you can get internet access. Are you moving your TV to another room in your home? That's simple with a Roku player -- less so with a cable connection.
While Roku is a significant force in the U.S. market, it has only recently gotten its international expansion underway. It just launched in Germany and plans to expand into Latin America soon. If it can achieve similar successes in foreign markets to what it has accomplished domestically, it could add fuel to the fire.
An excellent business cheaper than historical valations
After Roku's stock price slump last year, it's trading at lower valuations. Its price-to-sales ratio of 12 is about where it was trading before the pandemic, during which it has gained tens of millions of new accounts.
Its price-to-earnings ratio of 109 and its price-to-free-cash-flow ratio of 115 are near their lowest levels yet in the relatively brief period since the company became both free cash flow positive and profitable.
Roku is an excellent business with accelerating revenue growth and tailwinds that should prove long-lasting, and right now, it's trading at a relatively inexpensive valuation. That's why Roku is my favorite Cathie Wood stock right now.
