Media-streaming technology expert Roku (ROKU -10.29%) made a robust comeback in 2023. The stock more than doubled, with a 128% gain in 52 weeks. Yet, that big jump barely made a dent in the damage Roku's shares took in 2021 and 2022. All told, share prices remain more than 80% below the all-time highs from the summer of 2021.
So I keep buying more Roku stock in this deep market trough. Roku is one of the clearest long-term growth stories in the market today, similar in many ways to former corporate parent Netflix (NFLX -0.63%) in 2011.
I can't promise that Roku's stock will return more than 4,100% over the next 12 years, as Netflix has done. Even a faded photocopy of a parody of the real thing would be enough to make serious money for Roku investors.
In other words, I still see Roku as a strong buy even after its recent gains. Here are the four most compelling reasons why.
1. So far, Roku has only captured a small slice of a massive target market
... or maybe I should say, "a small slice of several massive target markets."
There's a lot to unpack here, but I'll try to keep it brief. You have places to go and people to meet, I'm sure.
- Roku is a leading provider of user experience platforms for streaming media services. The market itself is booming and should effectively replace old-school movie and TV solutions in the long run. The cord-cutting trend is not going away, and the final target market could work out to billions of households.
- The company is also a major player in digital advertising. That sector is in a deep slump these days, as ad buyers are holding their wallets in an iron grip. It doesn't make sense to launch expensive marketing campaigns in an era where consumers aren't ready to buy what you're selling, right? But someday, the digital ad market should rekindle its stalled growth. This global market was worth $627 billion in 2023 and should reach $836 billion by 2026, with Roku possibly capturing a larger slice of that pie.
- This hungry innovator wants more opportunity than these two key sectors can provide. Hence, Roku has also entered the content creation industry and its own brand of smart TV sets. And it wouldn't surprise me to see other connections to media-adjacent markets in 2024 and beyond.
2. The company is pulling out all the stops to boost user growth
By the end of 2020, with the unique coronavirus lockdowns in the rearview mirror, Roku sported 51.2 million active user accounts. The average revenue per user (ARPU) stood at $28.76 per year. Roku's stock plunge started soon thereafter, as bearish investors wrote the company off as a spent COVID-19 play with no future.
When the inflation crisis started later that year, Roku held its pricing steady while many competitors passed their rising costs on to their users. Together with continued innovations and Roku's entry into original content productions, the steady pricing kept the fires burning under the company's user growth. In November's Q3 2023 report, the user count rose by 48% to 75.8 million names. The annual ARPU jumped 43% higher over the same period, landing at $41.03.
Yes, Roku's bottom-line profits have been negative for a while. However, the company is building a massive user base from which it can explore profit-oriented strategies in the future. That's another lesson learned from Netflix's decades of evolving financial strategies.
3. Roku's business is probably healthier than you think right now
The headline numbers can look scary, but the worst bits are more accounting acrobatics than real cash costs.
Roku's cash balance has doubled since the end of 2020, and the positive cash flows continue today. The user count is soaring, free cash flows came in at 9.6% of revenues in the first three quarters of 2023, and Roku has paid off the last of its long-term debt papers.
This is not a struggling business gasping for air, despite a recent round of layoffs and impairment charges. The company is reshaping its business plan to include more in-house content production, and those earnings-sapping impairment charges largely came from dropping third-party content licenses earlier than expected.
4. The leadership team learned a lot from Netflix
I'm talking about the video-streaming pioneer's successes, as well as its mistakes.
Roku CEO and founder Anthony Wood is a serial entrepreneur. The company name means "six" in Japanese, because it was the sixth business Wood started. Roku's history as a stand-alone business started when Netflix decided to cut its streaming player hardware operations loose from the rest of the company, encouraging a stronger partner network. With an in-house media player, Netflix would essentially compete with other consumer electronics firms, possibly pushing them away from building Netflix into their own products.
The focus on partnership continues in Roku's separate era. These days, the consumer goods specialists are the company's natural rivals in many ways, but Roku still sells streaming-platform software to many of them. Furthermore, every streaming service worth its salt needs to support the Roku system, because the company dominates the global market with a 51% share of all connected TV devices.
But wait -- there's more to know about Roku's Netflix connections.
The company's board of directors holds a seat for Neil Hunt, Netflix's chief product officer from 1999 to 2017. That lengthy span included Netflix's entire DVD-mailing triumph, the silly Qwikster debacle, the digital media launch, and its early years in the content creation business.
Hunt was more than a fly on the wall in Netflix's formative years. You can bet that he is bringing that experience into Roku's boardroom on the regular. Remember, that's where the company builds and support its long-term business strategy. Whatever inside baseball Neil Hunt knows from his Netflix career should serve Roku well as it executes a similar growth strategy.
And you can do far worse than ripping pages from Netflix's market-beating playbook for long-term growth. Again, even a poor impression of that masterful role model should result in a fantastic business.
