As Wall Street begins to recover from the bear market of 2022, opportunities arise for investors seeking to buy high-quality stocks at affordable prices. Roku (ROKU -3.87%), the media-streaming technology expert, is one such opportunity. In fact, I would argue that it is a tremendously strong buy nowadays.
Here's one quick and easy way to think about it.
- I thought Roku was a great buy a year ago.
- The long-term business opportunity is as great as it ever was, but Roku's stock is 36% cheaper now.
- So if you expect digital media streams to continue conquering the world, Roku strikes me as the best way to tap into that game-changing secular trend right now.
That's the short-short version of my hot take on Roku. Read on for a fuller explanation.
Why Roku shares are found in Wall Street's bargain bin
I get why Roku bears aren't terribly excited about the stock. I mean, this chart could send traditional value investors looking for a warm blanket and a nice cup of tea:
ROKU Revenue (TTM) data by YCharts
The top-line growth has stalled out in recent quarters and the company is burning cash on a regular basis. That chart looks like the start of a terrifying roller coaster, and the only way is down.
What's not to hate, right?
Buckle up, we're streaming
Everyone and their grandmother seems to be switching gears to digital streaming. We're all popcorn-ready, waiting to see who emerges victorious from the streaming gladiator pit, be it Netflix, Walt Disney, or some wildcard entrant. There's no shortage of hats in that ring.
But while the content providers duke it out, Roku is the savvy master of ceremonies that's set to profit from the entire spectacle. Whatever the streaming content specialists do or spend in order to support their digital growth plans, the sector-leading platform provider benefits from all of those efforts. And one company has grabbed a 50% share of the North American market, which often sets the tone for the rest of the world.
You guessed it -- that's Roku!
Captain of its own ship
It's true that Roku's revenue growth has been lacking a bit recently. But this company is not about to walk the financial plank. Roku has a firm grip on its fiscal situation, and the company keeps reinvesting its gross profits into drivers of future growth.
In the first quarter of 2023, Roku beefed up its research and development (R&D) budget by 34% and marketing efforts by an even meatier 60% from the year-ago quarter.
Does that sound like a company cowering in the corner, quietly waiting for the economic storm to pass?
I don't think so. Roku is taking control of its own future, and this swagger is deeply justified.
This is the confident policy of a business focused on the far horizon. The waters may be rough right now but there will be smooth sailing in the years ahead. And hey, with $1.6 billion in cash reserves and zero long-term debt, Roku has a treasure chest to back its confidence. At the current rate of cash consumption, it'll take several years before Roku goes looking for fresh debt or stock sales just to keep the lights on.
Ads are down, but not out
And I'll eat my hat if Roku's downturn in ad sales hangs around for that long.
Once inflation eases its death grip and interest rates take a chill pill, I foresee a tidal wave of advertising revenue. Not just for Roku, but across the entire advertising sector -- and especially in the field of highly targeted digital ads. The economic experts at PwC expect ad sales to pass $1 trillion by 2027, led by ad-supported video streams.
Roku, with its broadly ad-supported streaming platform and the growing Roku Channel, should surf right at the crest when that wave hits. It's just a matter of time before those top-line growth trends are back in the green and the free cash flows are gushing again.
Don't call it a comeback when that happens. Roku has been there for years, prepping for that highly probable future.
Sure, Roku's stock is currently chilling at 87% below its 2021 all-time high. But with these tailwinds at its back, the company is positioned for a skyrocketing financial future -- and the stock chart will surely follow.
So, grab your popcorn, sit back, and consider whether Roku might be the right play for you. As always, you should double-check my assumptions and do your own analysis before betting any hard-earned doubloons on this. However, don't be surprised if you end up reaching for Roku's buy button. In my view, the imbalance between low stock prices and incredible long-term business prospects is downright inspiring.
