Growth stocks are picking up steam again after tanking at the beginning of the bear market. Valuations are looking reasonable, or even cheap, considering the potential for many high-growth companies.
Roku (ROKU 5.41%) stock plummeted along with other growth stocks last year, but it's slowly making its way back up. It's still down around 40% over the past year, but there are signs of a great business with robust long-term opportunities, and at this price, it looks like it's time to buy.
Short-term challenges
Roku is a streaming company, but it has a different core business than most streamers like Netflix or Walt Disney.
First of all, it sells hardware. An essential piece of its business is its player segment, which comprises sales of streaming devices. Roku's devices are very popular, and management says that its operating system accounted for 43% of total market share in the 2023 first quarter, more than the next three operating systems combined.
It's also affordable. Management made the decision to keep prices low despite supply chain backups and now inflation, and that contributed to falling sales for several quarters. But it's now benefiting Roku with higher sales and more market share. Player sales increased 18% over last year in the first quarter.
The player segment only accounted for about 15% of total sales in the first quarter, which is a typical percentage. The company's much bigger business is what it calls platform sales and includes ad sales and partnership revenue. This business also differentiates it from the standard premium streaming service. Together, customers have a combined experience where they can stream most of their favorite networks in one place and watch many popular shows for free on the Roku channel.
Not only does platform revenue account for the bulk of the business, historically, it's been the higher-growth segment. In fact, this is the first quarter as a public company that Roku has posted a decline in the platform segment, at 1% down from last year.
The premise of the business is that although cord-cutting continues at a fast pace, streaming is still only a fraction of total viewing hours. Advertisers see the big picture and are moving over their money to streaming to capture the market as it grows. That's been driving sales for Roku's platform business. However, inflation is forcing all kinds of companies to rethink their budgets, and advertisers are slowing down spending.
Long-term opportunities
Despite the poor platform performance in the first quarter, Roku eked out a 1% year-over-year increase in total revenue. There were also many signs of operational health and preparation for a rebound, like seeds waiting to sprout at the right time.
Active accounts continue to grow consecutively each quarter and were up 17% over last year in the first quarter. Streaming hours increased 20% over last year. These are the most important metrics for advertisers to see, and when their own businesses rebound, they know where to find eyes.
Roku continues to innovate with new concepts in advertising on its site as well as offering a robust set of data tools for advertisers to measure performance. Management expects the pressure to persist in the meantime, but it's setting itself up to rebound in the future.
Should you buy Roku stock now?
After Roku stock plunged at the beginning of the bear market, investors realized that the price is too low in light of the company's performance and opportunities. It's already up 38% this year. At this price, shares trade at only 2.5 times trailing-12-month sales.
Roku is still growing sales and capturing market share, and its model is the future of content viewing. On the flip side, it's posting heavy and growing losses. However, it has been profitable in the past and is working toward cutting costs to improve efficiency.
The stock might continue to rise in the short term, or it might not, but it's the long-term opportunity that bodes so well for Roku and makes the stock look like a compelling buy at this price.
