Cathie Wood went shopping on Wednesday as streaming service stocks were falling. The CEO, founder, and primary stock picker for Ark Invest made the most of the deluge, adding shares of Roku (ROKU 1.58%) to two of her exchange-traded funds.
Wood's been in a slump over the past year, so it's easy to see why investors aren't necessarily getting excited about her latest additions. Roku? Now? The allure of Roku at current levels is intriguing. It may not seem that way with the shares down a blistering 78% since peaking last summer. Let's take a closer look at what Wood may be seeing that the rest of the market is missing.
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Stream work
Let's start with the market's latest misunderstanding when it comes to Roku. Shares of the streaming entertainment pioneer took a 6% hit on Wednesday. Netflix (NFLX 1.74%) stunned investors with a sequential dip in subscribers and a bleak outlook calling for defections to accelerate in the current quarter.
Streaming services took a hit, and understandably so. If customer loyalty is wavering at Netflix, why would smaller rivals fare any better? The problem with Roku tumbling in sympathy is that this is actually a bullish development for the company. Roku is not a premium streaming service itself. It runs the country's leading smart TV operating system, and it's free to use since it feasts on ad revenue. If the top dog in streaming is struggling with churn, you can be sure that rivals will be paying up to stand out on Roku's platform, which serves more than 60 million active accounts.
Even Netflix may have to start shelling out funds for marketing. That's a pretty big deal for Roku.
"We do not expect revenue from Netflix to be material to our operating results for the foreseeable future," Roku warned in its prospectus five years ago.
When Netflix was on top of the world there wasn't a need for paid promotions. Things are clearly getting a bit more challenging now, and Netflix needs to pay up to generate leads again. Roku will be there with its dominant market share, collecting revenue from all of the hungry streaming services.
Roku will announce fresh financial results a week from now. It's highly unlikely to follow Netflix lower in terms of usage. Momentum is on its side. Its audience grew at a respectable 17% clip last year, and average revenue per user has soared 43% over the past four quarters. There may have been concerns last summer that folks weren't going to stay home and stream TV after being cooped up for so long during the pandemic, but in reality people just can't get enough of on-demand streaming content. A record 19.5 billion hours were streamed through Roku devices in its latest quarter.
The stock is cheaper than you think. Its cash-rich balance sheet leaves it at an enterprise value of $13.3 billion after Wednesday's sell-off, less than four times this year's projected revenue. Supply chain constraints on the hardware end and investments in content have weighed on margins in the near term, but the former is transitory and the latter is brilliant. Netflix is likely losing subscribers to cheaper services, and that likely includes the expanding catalog available through the free ad-supported Roku Channel.
Next week's report may not be perfect. It doesn't have to be. Roku has the advantage of issuing its guidance -- calling for 25% year-over-year growth for the first quarter -- several weeks after Netflix initiated its forecast for the same three-month period. Roku is less likely to disappoint. In a world where even Netflix is entertaining an ad-based subscription tier the future is bright for the misunderstood leader of the stream dream team.
