I know we're more than halfway done with this year already. And the stock I'm about to recommend (again!) has already doubled its share price in 2023. Yet, it's not too late to invest in Roku (ROKU -10.29%) -- not by a long shot.
The media-streaming technology expert has been one of my favorite stocks to buy all year long. And here I am, recommending Roku again. It's still a brilliant growth stock with massive long-term growth prospects.
Roku's long-term business opportunity
Here's how Roku's business plan has evolved so far:
- Dominate the domestic market for user-friendly media-streaming platforms.
- Boost the value of existing markets with additional business operations such as original programming and targeted advertising.
- With the lessons learned from the American success, expand Roku's market reach on a global scale.
The first step is complete. Roku holds a 43% share of the U.S. market for smart TV operating systems, according to research firm Circana. That's more than the total of the next three providers. The advertising business has already grown large and important enough that Roku's sales growth slowed down tremendously amid the ad market downturn in 2022.
The next step is global expansion. In the long run, Roku could become the preferred media-streaming systems provider around the world just as that all-digital entertainment option takes the baton from cable, satellite, and broadcast channels. And when you bake Roku's targeted ad sales into that equation, you're looking at a truly epic worldwide market opportunity.
Cathie Wood's ARK Invest analyzed Roku's long-term prospects last year. The firm estimated a global addressable market of 1.2 billion households with access to digital media-streaming services by the year 2026. Suppose Roku can establish just half the market dominance it holds at home across the worldwide market and keep its average revenue per user steady at roughly $13.50 per month. In that case, it would have an annual revenue stream of nearly $43 billion.
That's a 13-fold revenue growth target. Roku may not hit that jackpot in four years, but even a small slice of this gigantic opportunity is enough to motivate a much higher stock price.
Mr. Market's excessive price cut
After falling 83% from the peaks of July 2021, Roku's stock trades at just 3.7 times trailing sales. That's comparable to the sales-based valuation of classic value investments such as tobacco giant Altria (MO -0.37%) or healthcare expert Johnson & Johnson (JNJ -0.46%). But those slow-and-steady business titans can't compare to Roku's high-octane business growth. Knee-deep in an industrywide slowdown, Roku still delivers double-digit growth on the top line. Stalwarts like J&J and Altria are happy to stay just above the break-even line under these circumstances:
ROKU Revenue (Annual YoY Growth) data by YCharts
So I see no reason why these three stocks should trade at similar sales-based valuation ratios. Roku is dining on growth, while others are nibbling on leftovers. Yet they command similar price-to-sales ratios.
In other words, Roku looks deeply undervalued from the standpoint of current sales growth. The bargain-bin discount only grows larger when you include Roku's enormous long-term revenue goals.
Roku's stock has doubled in 2023, still leaving room for much bigger gains
Yes, Roku's stock has gained 104% year to date, but there is still a brutal mismatch between the company's business performance and the market's careless stock price cuts.
So despite the promising price jump Roku has seen this year, it has a long way to go before running out of financial rocket fuel. That's why Roku has been my top growth stock to buy since the price plunge started two years ago, and why I'm still excited about this investment opportunity today.
