Raging inflation and fears of an upcoming recession sent the stock market into a bear market in 2022. The S&P 500 and Nasdaq Composite market indices are still roughly 10% below the all-time highs of late 2021. However, no market meltdown lasts forever and the two leading index values are up by 14% and 37% in 2023, respectively.
So Wall Street has almost recovered from the market fears of yesteryear -- and there should be more gains in the months and years ahead. Every bear market in history has been followed by another bull market, and it looks like we are watching the next baton handoff right now.
Wherever we are in the ever-spinning market cycle, master investor Warren Buffett recommends buying shares of top-quality companies with a robust competitive advantage. It's even better if you can find that excellent stock at a reasonable price per share.
That's what I see in media-streaming technology expert Roku (ROKU 1.38%) right now. The company faces incredible long-term growth in a massive global market, but Roku's stock trades on the cheap for all the wrong reasons. Here are 3 crystal-clear reasons why Roku is my favorite buy right now.
1. The streaming video era has only just begun
Every media producer worth its salt is switching gears to the digital streaming field nowadays. The streaming wars are pitting specialists like Netflix against flexible sector titans such as Walt Disney. Everyone wants to offer the best mixture of proven winners and viewer-winning originals, and the long-term winners have not been decided by a long shot.
The market analysts at Fortune Business Insights pegged the video-streaming market at $456 billion in worldwide revenues last year. By 2030, the revenue stream should nearly quadruple to $1.9 trillion. This overview includes every part of the streaming opportunity, from content producers and streaming services to technology platforms and supporting software sales.
And whoever ends up winning the streaming content battle, Roku will benefit from soaring interest in the digital video idea as a whole. When Netflix and Disney spar over new viewers with fresh titles and new or improved services, Roku's smart TV platform stands ready to support both of them.
2. Roku is in full control of its financial future
You may have noticed that Roku's top-line growth has slowed in recent quarters, leading to bottom-line losses and negative cash flows. You should know that the company is well-equipped to handle a very long downturn.
In the first quarter of 2023, Roku reported a year-over-year revenue increase of just 1%. The bulk of this company's sales come from selling targeted advertising space across the media-viewing platform's interface and the 100% ad-supported Roku Channel. Due to economic pressure, most ad buyers have tightened their marketing belts dramatically in recent quarters. Marketing campaigns will surely be more effective when consumers are ready to buy stuff again, you know.
Due to the limited ad sales, Roku saw a net loss of $194 million. Free cash flows clocked in at a negative $208 million.
However, Roku could have avoided these scary bottom-line results by reducing its spending on research and development, or pumping the brakes on its own marketing efforts. That's what you would see in a real crisis.
But Roku boosted its R&D spending by 34% while lifting its sales and marketing costs 60% higher, both in comparison to the year-ago quarter. This is the spending style of a thriving business, whose management would rather lay the groundwork for continued growth instead of catering to short-term pressures.
And what if these negative numbers keep coming? Well, Roku may have burned $0.2 billion on cash reserves in the first quarter, but it has another $1.6 billion of cash equivalents on hand and zero long-term debt. In fact, the company paid off the last scraps of existing debt papers with an $80,000 check in the first quarter.
So Roku has several financial levers to pull and a robust pool of cash reserves to lean on.
Image source: Getty Images.
3. The advertising downturn will be short-lived
And I don't see the digital ad sales downturn lasting much longer.
The inflation crisis is long past its peak, and even the anti-inflation interest rate increases should come back down in the second half of the year. When they do, we should see a muscular inflow of revenues in the ad space as two years of fairly quiet product development and market research suddenly connects to refreshed marketing budgets.
I don't expect Roku to change its business plan very much when that happens. Just let the rejuvenated revenue streams refill the cash coffers. Operating expenses like marketing and R&D will continue to soar -- as they already did during the inflation-based market crisis.
With a renewed top-line growth trend and a return to strongly positive cash flows, both growth and value investors should find something to celebrate in Roku's long-term prospects. And the stock price, which currently sits 87% below the all-time highs of 2021, seems likely to skyrocket as a result.
Please double-check my assumptions and predictions before investing real money in Roku's stock. That's only sound investing, and exactly what Warren Buffett would do. Whatever you may find, one fact remains: this is my favorite stock recommendation in the current market, by a long shot.
