It's been a roller-coaster ride for Roku (ROKU +2.62%) shareholders in the past few years. The stock skyrocketed thanks to remarkable growth during the pandemic, only to come crashing down due to a notable slowdown.
As of this writing, shares of the streaming platform are down 81% from their peak price, which was set in July 2021. But there are reasons to be optimistic about the business, particularly if you can focus on the important factors.
With that being said, here's why Roku is a growth stock you should buy right now.
Secular growth story
Roku sells hardware sticks and smart TVs that allow consumers to watch streaming content from numerous sources. Additionally, Roku's platform lets companies sell ads to viewers in a connected-TV format. It's safe to say that Roku is essentially all in on the streaming revolution.
This has big implications for the company's future. Investors who buy Roku shares are essentially betting on the ongoing growth of streaming entertainment. And that seems like a smart move.
According to eMarketer, there are currently more households in the U.S. that don't have a traditional cable subscription than those that still have one. There are no signs that this cord-cutting trend is going to lose steam.
Roku continues to benefit. It has 75.8 million active accounts that streamed 26.7 billion hours of content in the third quarter of last year. Both of these figures are up significantly from just three years ago.
With there being well over 1 billion broadband households in the world, Roku has a massive total addressable market that it can try to penetrate. Capturing just a small sliver of this opportunity would lead to sizable financial success for the business.
NASDAQ: ROKU
Key Data Points
Stronger economic backdrop
Like many consumer-facing internet businesses, Roku's growth was supercharged during the worst days of the pandemic. But because of higher interest rates and inflationary pressures, the company saw its gains slow down substantially throughout 2022 and into the first quarter of 2023. This helps explain the stock's performance.
But things could be about to get better. Roku's revenue growth has actually accelerated in each of the last three quarters. In the period that ended Sept. 30, sales were up 20% year over year. And the company's active accounts jumped 16%.
After a downturn for the digital-ad market, investors are hoping that the industry is picking up some steam. The behemoths in the industry, like Alphabet and Meta Platforms, have been posting better revenue growth. And this momentum could continue trickling down to Roku.
Macroheadwinds forced marketing executives to pare back spending. But with the possibility of rate cuts being implemented throughout 2024, the economic backdrop could become a major tailwind. In the just-ended fourth quarter, the leadership team expect sales to rise 10%. If consumer spending becomes robust, this forecast could prove conservative.
The valuation is reasonable
Roku is an excellent stock to buy on the dip because the valuation isn't demanding. Even after shares soared 125% in 2023, they trade for a price-to-sales ratio of 3.9 (as of Jan. 8). This is below the historical average of 10.2. And it's a far cry from the peak valuation of about 30 in July 2021.
At this price, investors would be buying exposure to a leading streaming-platform business that could experience monumental growth in the decade ahead. That's enough of a reason to scoop up the stock.
To be fair, Roku has yet to post consistent positive net income. But the hope is that ongoing cost cuts, coupled with greater scale, can lead to profitability. Plus, with zero debt on the balance sheet, there is minimal risk of financial troubles happening.
It's a good idea to consider buying this stock with the intention of holding it for the long term.
