The past couple of years have been a roller coaster ride for investors. On the heels of a stunning downturn, the stock market staged a remarkable comeback. After falling 35% in 2022, the Nasdaq Composite rallied, gaining 43% in 2023. Technology stocks, which were among the hardest hit, were some of last year's biggest winners.
In spite of the remarkable market rebound, many stocks are well off their highs reached before last year's bear market. Roku (ROKU -10.29%) is a prime example. While the stock soared 125% last year, it's still down 83% from its mid-2021 high.
There's a growing body of evidence that suggests there's much more to come for the streaming pioneer. Furthermore, Roku represents a compelling opportunity for investors looking for a bargain.
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The numbers spin a compelling tale
Roku is the most widely used streaming platform in the world -- by a wide margin -- controlling 51% of the market, according to data analytics provider Pixalate. This represents the company's strongest showing since Q1 2020, according to the report.
There's more. Roku is quickly gaining share in the connected TV market, which will help supercharge its growth. Roku closed out 2022 as the top-selling smart TV operating system in the U.S., Canada, and Mexico and has continued to increase its share over the past year.
Roku makes the lion's share of its revenue from advertising. The company hosts an estimated 10,000 channels on its platform, the vast majority of which are ad-supported. In exchange for hosting a streaming channel, Roku gets 30% of the advertising displayed on its platform.
Then, there's The Roku Channel, the company's homegrown streaming offering. In mid-2023, The Roku Channel broke through the pack, one of just three free, ad-supported streaming television (FAST) channels to garner 1% or more of all television viewing. Perhaps more notable is that The Roku Channel's viewing audience remains comparable to that of Peacock (a subsidiary of Comcast's NBCUniversal) and HBO Max, owned by Warner Bros. Discovery.
Taken together, this helps illustrate the large and growing reach of Roku's platform, which is attracting the attention of advertisers.
Growth in the face of adversity
The past couple of years have been challenging for Roku, but a look under the hood shows a resilient company with a massive opportunity ahead. In the face of gale-force economic headwinds, the platform's audience has grown in each and every quarter.
In the third quarter, for example, active accounts grew 16% to 75.8 million, while streaming hours jumped 22% to 26.7 billion. That amounts to roughly three hours and 50 minutes of viewing time each day spent using a Roku device, up from three hours and 38 minutes in the prior-year quarter. This highly engaged audience is an opportunity advertisers can't afford to sleep on.
The secular decline in cable television is helping fuel that growth. The pay-TV industry lost a record 5.9 million subscribers in 2022, according to Leichtman Research Group, with 4.9 million cutting the cord during the first nine months of 2023. It stands to reason that Roku will become the home for many cable defectors, who will ultimately join the streaming revolution.
Roku is also capitalizing on the secular decline of broadcast television. Marketers have been following this trend closely, and advertising is beginning to follow the viewers. Ad spending on traditional broadcast TV fell 23% year over year in the third quarter, according to Standard Media Index (via MarketingDive). During the same period, ad spending on connected TVs and streaming video services increased 39%. Advertisers need access to this audience, and Roku paves the way.
Finally, Roku's recent results suggest the downturn-fueled headwinds are subsiding. In the third quarter, Roku's total net revenue grew 20% year over year, while its adjusted EBITDA turned positive for the first time since early 2022. As a recovery in the advertising industry continues to gain ground, Roku's digital ad business will rally.
Roku is remarkably cheap
Given the challenges of the past couple of years, it isn't surprising that many investors soured on Roku's prospects. However, as the evidence shows, the company weathered the storm and sits at the intersection of a couple of secular trends that should fuel its growth going forward.
Yet for all that potential, Roku stock is a compelling bargain, selling for less than 3 times next year's sales, still near the lowest valuation in the company's history.
As viewers abandon cable and broadcast TV, Roku's audience continues to grow. That, combined with a deeply discounted valuation, suggests now is the time to buy Roku stock.
