Does streaming giant Roku (ROKU -10.29%) finally have its mojo back? On the one hand, the company substantially outperformed the otherwise high-flying broader market in 2023. However, after it rose by more than 60% over the trailing 12 months, some investors might worry that they missed the boat. The good news is that they haven't: There are still excellent reasons to buy Roku's shares this year and hold them for the long haul. Let's consider just three of them.
1. Streaming will continue to gain ground
Roku provides a platform for accessing the most prominent streaming services in one convenient location. As streaming continues to grab a higher share of viewing time, Roku will benefit since that will mean more people are glued to their screens, attracting more advertisers. It is no secret that streaming has been rising in popularity for years. The convenience it offers compared to cable and the ability to binge-watch shows on multiple devices are two of its selling points.
However, streaming likely hasn't peaked yet, especially outside the U.S. In November, streaming accounted for 36.1% of television viewing time in the U.S., up from 32.4% in November 2022. The worldwide opportunity remains vast -- the U.S. is one of streaming's most penetrated markets -- and it will provide a tailwind for Roku for years. In other words, entering 2024, the company still has significant growth opportunities ahead, which is a good reason to consider buying the stock.
2. The advertising market is still rebounding
Many investors abandoned Roku for much of 2022 as ad spending dropped, along with the company's revenue. However, things were different last year. Companies increased their advertising budgets, especially in the second and third quarters, which provided a significant boost to the company. According to some analysts, things will be even better in the advertising market this year, so we should expect Roku to reap the benefits again.
But that won't stop in 2024. Advertising dollars should continue moving from cable to streaming over the long run. Companies will follow potential customers wherever they go. It's also worth noting that Roku arguably benefits from the network effect. The more viewers join its ecosystem, the more attractive it becomes to advertisers. That's why the company can profit from the massive long-term opportunities provided by the growth of streaming.
Yes, advertising is a cyclical business, as the past couple of years have demonstrated. That means Roku's revenue, the bulk of which comes from this market, will sometimes suffer when economic conditions worsen. That's no reason to avoid the stock; no company, however successful, has an unimpeded path to the top.
3. Roku still looks reasonably valued
Although Roku soared last year, the company's shares still don't look prohibitively expensive. The streaming specialist's forward price-to-sales ratio currently tops 3.1.
ROKU PS Ratio (Forward) data by YCharts
Although that's higher than what is considered good, which is generally under 2, Roku's forward P/S still looks low compared to 18 months ago. In my view, Roku's shares are attractive at current levels, given the vast market opportunity available to the company.
For 2024 and beyond
While Roku stock looks attractive this year, investors shouldn't invest in the company as a bet that it will crush the market in 2024. It might, but it might not. Whatever happens, the long-term view for Roku hasn't changed. The company's business should win no matter which streaming service rises to the top. Further, its network effect, growing ecosystem, and increasing hours viewed ensure advertisers continue flocking to its platform. These factors make Roku a top stock pick for investors focused on the long game.
