You know all the classic mistakes, right?
- Never go in against a Sicilian when death is on the line.
- Never get involved in a land war in Asia.
- Never assume that formerly high-flying stock will climb back to those lofty all-time highs.
Vizzini from The Princess Bride can tell you all about the first two examples. I'm just here to explain why it's inconceivable that I would fall for the third one. Specifically, that fallacy is not why I'm pounding the table for Roku (ROKU -10.29%) these days -- the media-streaming technology expert's growth prospects go far beyond a fading chart squiggle.
Yes, I really am pounding the table for Roku's stock. It's just that my Roku enthusiasm goes above and beyond that rise-and-fall stock chart.
A picture does tell a few words, though
Let's start with the charts, though. Like, does this graph ring a bell at first glance?
That's a seven-year stock price overview of Sirius XM Holdings (SIRI) around the turn of the millennium. Over this span, the stock that was known as Sirius Satellite Radio at the time rose from $4 to $65 per share, then plunged below the $1 dollar mark three years later. Even after a quick recovery to $3 per share, Sirius' stock traded 95% below the early 2000 peak.
I'm bringing Sirius up because Roku's last few years bear a striking resemblance to that chart:
ROKU data by https://ycharts.com">YCharts
The scales are a bit different, but the pattern is similar. Roku's shares soared from $55 to $480 in three years, driven by the explosion of new video-streaming services and accelerated by the COVID-19 lockdown period. But the joy didn't last and Roku's stock price dipped below $39 per share by the end of 2022. Streaming service providers showed cracks in their seemingly bulletproof growth prospects. Even titans like Netflix and Walt Disney lost more subscribers than they gained in a couple of quarters. Meanwhile, Roku's burgeoning ad sales ran into a brick wall when advertisers battled inflation by limiting their marketing budgets.
So here we are. Roku's stock has nearly doubled in 2023 but remains 83% below the peak pricing from two summers ago.
Why bring Sirius into a Roku story?
At first glance, the two charts above look similar. However, they came from dramatically different circumstances. Sirius' short-lived spike was a speculative surge of interest in an as-yet unproven business idea. Let me take you on a history trip.
For many years after Sirius Satellite's big swan dive, many investors insisted that the stock would set fresh record prices again.
Any article suggesting otherwise was quickly drowned in angry reader comments and emails to the editor. Inconceivable! Sirius Satellite could do no wrong, and the massive crash was just a terrible market mistake. That mistake would surely be corrected as consumers embraced the satellite radio services of Sirius and the then-separate XM Radio, making old-school FM radio and online challengers such as Pandora Media obsolete in the process.
The first geostationary radio-service satellites were launched several months after Sirius Satellite's skyrocketing stock peak, mind you. It was a very different stock back then, with just 29 million shares on the market and a tip-top market cap of $1.9 billion. Today, Sirius is worth $18.3 billion but the stock price is a modest $4.75 -- still 92% below the ancient all-time high.
You see, the company has a long history of financing expensive projects such as acquisitions and satellite launches with a painful combination of debt papers and stock sales. Those 29 million shares have turned into 3.8 billion stubs over time.
So Sirius did rebuild the peak market value from the speculative days before launching satellites and services, but the stock price never recovered.
Why Roku is a different story
By contrast, Roku had a firmly established business going long before its stock price peaked in 2021.
- When its stock soared on pure speculation, Sirius had no revenue to speak of. Roku's trailing sales stood at $2.3 billion two summers ago (and $3.2 billion today).
- Roku had 56.4 million active user accounts in the summer of 2021 and has 73.5 million today. Again, Sirius had no business operations going in the spring of 2000.
- Roku is an established market leader in North America and is spreading its influence around the world. Most of the company's growth is managed through software sales, technology licenses, and advertising deals. Sirius XM would need to launch new satellites in order to expand its core business into new markets.
- Let me also point out that Roku's balance sheet is the picture of health, zeroing out its long-term debt in the first quarter of 2023 with $1.8 billion of cash equivalents on hand today. Sirius raised $9.4 billion of long-term debt over the years, and we already talked about its massive stock-sale dilution.
And that's why the two charts above don't tell the whole story. Roku is properly positioned to become a media powerhouse on a global scale, tapping into the mega-scale market for streaming media platforms in every country.
That promise of growing robust shareholder value in the long term was never in the cards for Sirius two decades ago, and the stock has underperformed the market over the last five, 10, and 20 years -- with or without dividend reinvestment.
In other words, Roku is still one of my favorite buys in this market. But did I build that thesis around Roku's old chart peak? Inconceivable! My recommendation is all about Roku's unstoppable business growth and expanding market reach.
