From its initial public offering in September 2017 to its all-time high in July 2021, Roku (ROKU +2.43%) stock has skyrocketed nearly 2,000%. As was the case with many tech businesses, the pandemic also lifted this company to new heights.
But given more subdued investor interest, coupled with a growth slowdown, this streaming stock is currently 87% below its all-time high. It now trades at a historically cheap price-to-sales ratio of 2.6.
Besides that compelling valuation, here are three reasons to consider buying Roku like there's no tomorrow.
Riding the cord-cutting trend
Thanks to the rise of the internet, consumers are no longer restricted to watching video entertainment via traditional cable subscriptions. The so-called cord-cutting trend is a powerful secular tailwind that still has lots of room to go. In the U.S., perhaps the most developed market when it comes to streaming, more than half of all households have decided to ditch their cable packages, according to eMarketer.
All of this benefits Roku, which aims to be an agnostic streaming platform that allows viewers to watch all of their content services on one easy-to-use platform. Moreover, advertisers looking to target a streaming audience can utilize Roku's technology to do so.
While the business generated 16% of its total 2023 revenue from the sale of hardware devices, 84% of sales came from the platform division. This includes revenue from advertising and subscription agreements. This segment has become more important to the company over time, a positive trend given that it generates a gross margin of 55%.
Compared to the major content companies out there that have to spend billions and billions of dollars every year to create or acquire content, Roku is in an advantageous position. "Roku is not in the streaming wars," said the president of Roku Media, Charlie Collier, last year. "The streaming wars are playing out on the Roku platform."
Basically, it doesn't matter what service attracts the most users. As long as streaming becomes more and more popular over time, Roku should gain.
NASDAQ: ROKU
Key Data Points
Top market share
Roku is the leading smart TV operating system in the U.S., Canada, and Mexico. This leading market share demonstrates just how dominant the company's position is. To be fair, Roku does have to compete with big tech rivals that have their own streaming operations, but its industry-leading position speaks for itself.
Despite macroeconomic headwinds over the past couple of years, Roku continues to report strong metrics. In the last 12 months, an incredible 106 billion hours of content were streamed on the Roku platform, a figure that was up 21% compared to 2022. The business also saw its active accounts increase by 14% to 80 million.
Waiting on better industry conditions
One key metric that I didn't mention above was average revenue per user (ARPU). In the fourth quarter last year, this came in at $39.92 for Roku, which was down 4% versus the prior year. Management called out an unfavorable industry environment that's pressuring spending on advertising. Given that many people still fear a recession is looming, it makes sense why companies would cut back on marketing budgets when they expect difficult times ahead.
The good news, though, is that Roku's ARPU is significantly higher than it was just three years ago. This is a clear indication that the company is better able to monetize a growing and more engaged user base. Once economic and industry conditions improve, that ARPU figure should get back on the right track to posting solid gains.
As of Dec. 31, Roku had $2 billion of cash and cash equivalents, compared to zero debt, on its balance sheet. This means that it should be able to weather whatever economic storm comes. But as ad spending transitions from linear TV to connected TV, Roku has a powerful tailwind working in its favor. This creates the perfect recipe for long-term growth.
