After the S&P 500 rose 24% in 2023, some investors worried the market would have to take a breather in the new year. But that hasn't been the case as the index has hit fresh all-time highs in the month of January.
But there are still stocks trading well below their peak prices. Look at streaming platform Roku (ROKU -10.29%), whose shares have jumped 120% since the beginning of last year but remain 82% below their all-time high.
That's a potential opportunity. Here are three reasons investors should buy this growth tech stock like there's no tomorrow.
Strength of key metrics
Roku continues to post healthy trends with its key performance metrics. In Q3 2023, the business reported a revenue increase of 20% year over year, marking the fourth straight quarter of accelerating growth.
Despite economic headwinds that have derailed many other businesses, Roku keeps expanding its user base too. Active accounts currently total 75.8 million, up 16% year over year. This wide reach makes Roku the leading smart-TV operating system in the U.S., Canada, and Mexico.
It's also extremely encouraging to see higher engagement. Hours streamed on the Roku platform increased 22% to 26.7 billion in the quarter. Management said the average account streams 3.9 hours of content per day.
Roku's average revenue per user declined 7% from the year-ago period, but it does appear to have stabilized after increasing from Q2 2023. A recovering digital ad market (more on this below) likely deserves the credit here.
Favorable industry position
When we look at the broad streaming landscape, it's hard to find a better-positioned business than Roku. For starters, the company continues to benefit from the powerful secular tailwind of consumers abandoning traditional cable TV in favor of streaming. The percentage of U.S. households with a traditional pay-TV subscription fell to just 45.6% last year, and that figure is expected to fall to just 34.9% by 2027.
Plus, with the seemingly endless number of streaming services on the market today, having a platform like Roku that offers an easy-to-use, all-in-one interface for these services is extremely valuable for viewers.
Roku's industry positioning also means it can avoid the tens of billions of dollars in annual content spending the largest streaming companies must dish out every year. Warren Buffett once said, "The best business is a royalty on the growth of others, requiring little capital itself." While completely avoiding the streaming content wars, Roku still gains on the back of the massive investments from companies like Netflix and Walt Disney.
That said, Roku does dabble in its own original content, but its focus remains on being an agnostic distribution platform for other content services. That is a good place to be in this industry.
Digital ad rebound
Another reason to buy Roku is the impending rebound in the digital ad market. Roku's platform segment, which generates 86% of the company's overall revenue, grew sales 18% year over year in Q3 2023. This segment relies primarily on advertising deals -- to see it post double-digit growth is an encouraging sign for the overall industry.
"We saw continued signs of rebound: In Q3, the year-over-year growth of video advertising on the Roku platform outperformed both the overall ad market and the linear-TV ad market in the U.S.," management said in the latest shareholder letter.
There's also a huge long-term opportunity for Roku to capture the shift in ad spending from traditional linear TV to a streaming and connected-TV environment. In fact, streaming ad dollars are still underrepresented in relation to how much viewership goes to streaming. As the gap closes, Roku is in a prime position to benefit.
