After tremendous growth during the pandemic, when consumers were stuck at home and turned to streaming entertainment, Roku (ROKU 0.95%) has been facing a major slowdown. And shareholders have felt the pain, as the stock cratered 82% in 2022.
But the new year has brought renewed optimism for growth tech stocks. Shares have climbed 106% in 2023, as of Sept. 7, riding the gains of the Nasdaq Composite Index. Does this mean now is still a good time to buy Roku stock?
Here are three reasons this might be a smart idea for your portfolio.
A beaten-down valuation
Investors will initially be drawn to Roku's attractive valuation, with a current price-to-sales multiple of 3.6. That's much more expensive than where the stock was in January, but looking at Roku since its initial public offering in late 2017, shares are extremely cheap on a historical basis. And they are currently 83% below their all-time high.
When expectations for a company are low and pessimism is elevated, investors can benefit from the potential of outsize gains -- be greedy when others are fearful, legendary investor Warren Buffett says. Roku presents the opportunity to do just that right now.
And from a balance sheet perspective, the business looks safe. As of June 30, Roku had more cash and cash equivalents ($1.8 billion) than total liabilities ($1.6 billion). This can give investors some confidence knowing that the company is in no real danger of running into financial troubles.
Exciting long-term potential
Putting capital into companies that are riding broad secular trends can be a fruitful endeavor. Roku is sitting at the center of the transition from cable TV to streaming video entertainment. The business has 73.5 million active accounts, up 16% year over year, and they streamed a total of 25.1 billion hours of content in the three months that ended June 30. Roku is a powerful force in the connected-TV market, with a top share in the U.S., Canada, and Mexico.
According to eMarketer, there are now more U.S. households without a traditional cable subscription than those that still have one, a trend that should become more pronounced in the next several years. Viewers find that streaming services provide a superior user experience, with greater choice and convenience.
Working in streaming's favor is the ongoing shift of professional sports' media rights to direct-to-consumer services, with Alphabet's YouTube now selling NFL Sunday Ticket packages and Apple purchasing rights for Major League Baseball and soccer. Live sports are one of the last important advantages cable TV has, but this appears to be diminishing.
The sizable potential that Roku has as we look toward the next decade puts the company's recent struggles into perspective. Revenue in the first six months of 2023 was up just 6% year over year. A soft ad market that is still recovering deserves the blame, a headwind management believes will be temporary.
Avoiding the streaming wars
"I've said it before, and I'd say it with pride, Roku is not in the streaming wars," Charlie Collier, president of the company's Roku Media division, said on the first-quarter earnings call. "The streaming wars are being played out on our platform."
What exactly did he mean by this? The "streaming wars" refers to the constant battle among major content producers, like Netflix, Walt Disney, Warner Bros Discovery, and others, which includes spending exorbitant amounts to develop new content and attract subscribers. It's obviously a costly endeavor, demonstrated by the financial woes these businesses are dealing with in their streaming segments (except Netflix).
By simply being an aggregator of these different services, Roku tries to avoid this game altogether. And that's what Collier meant by his comments. The business can essentially grow on the backs of the huge capital investments being made by the content companies. That's an advantageous position to be in.
