Since the company reported financial results on Feb. 15, shares of Roku (ROKU -10.29%) have tanked more than 30%. Investors weren't pleased with the possibility of more difficult days ahead. They clearly want the days of rapid growth to return.
The big picture is even scarier. As of this writing, this streaming stock is down 87% from its peak price. Some naysayers might view the current situation as a reason to totally avoid this business. However, I remain optimistic. Here's why Roku is still a spectacular growth stock to buy right now.
Losing interest
From its initial public offering in September 2017 to its all-time high in July 2021, Roku shares skyrocketed almost 2,000%. The business was posting stellar growth for a while, but it was buoyed more by the coronavirus pandemic, which forced people to stay at home and find entertainment value on the TV screen.
However, as with many internet-based tech enterprises, there was a major slowdown in the past couple of years, particularly as consumer behavior normalized. Roku's revenue increased by 13.1% in 2022 and 11.5% in 2023, down substantially from prior years.
General weakness in the digital ad market also didn't do much to help investor sentiment. On the latest earnings call, management pointed to "challenges in the macro environment and an uneven ad market recovery." This could help explain why the stock suddenly dropped after the news.
Dominant firms in the digital ad space, like Alphabet, Meta Platforms, and Amazon, are also posting strong growth. Maybe Roku shareholders think there are deeper issues that it's dealing with.
Nonetheless, the stock is cheap. It trades at a price-to-sales multiple of 2.6. That's well below the historical average of 10. It's safe to say that there still isn't a lot of enthusiasm surrounding this company's prospects.
Zoom out
While the market sleeps on Roku, mainly because of weak near-term trends, investors should remain focused on the bigger picture. Roku remains one of the best ways to gain portfolio exposure to the rise of streaming entertainment.
The business sells hardware devices and smart TVs that allow people to aggregate all their favorite shows and movies from multiple streaming services into a single interface. That alone adds value because of the sheer number of content options out there. Having them all in one place improves the viewer experience.
But knowing that advertising dollars will follow the eyeballs, Anthony Wood, Roku's founder and CEO, developed a platform for companies to target this streaming audience. Roku currently has 80 million active accounts that watched 29.1 billion hours of content in the last three months of 2023. This creates a lot of so-called digital real estate to serve up ads.
And given that Roku's platform segment, where it makes money from subscription and advertising agreements, posts a stellar gross margin of 55%, as this part of the business grows, profitability should hopefully follow.
The outlook for 2024 might not be as rosy as many investors had hoped. But there is a huge runway for Roku to penetrate. According to data from Nielsen, 36% of TV viewing time in the U.S. is represented by streaming services. That penetration rate should continue marching higher.
Of course, none of this is going to play out in the next quarter or two. The entertainment industry has continued to undergo changes in terms of how people view content. Roku is in a favorable position to benefit from more activity moving to streaming, which will happen over years and decades. This just means it's best to buy and hold the stock for the long term.
