The streaming industry has evolved considerably over the past decade. One notable change has been a massive increase in the number of competitors. Still, some of the longtime leaders remain at the top. One of them is Roku (ROKU 3.85%), one of the most prominent players in the connected TV market. Though the tech company has delivered market-beating returns since its 2017 IPO, some think the best is in the rearview mirror.
Others think the company's shares are overvalued. These (and other) reasons explain why Roku stock is down by 28% year to date. Despite these headwinds, the company remains an excellent long-term bet. Let's consider why.
Roku's massive worldwide market
Roku has made tremendous progress since its IPO. All of the company's most important metrics have moved in the right direction, from active accounts to viewing hours. However, the company's growth rate has also slowed.
That's par for the course as corporations become bigger. It's extremely difficult to maintain the same pace as they had when they were relatively small. That's hardly a good reason to ignore the stock, especially as there remains massive whitespace in the streaming market.
Roku ended the fourth quarter with 80 million active accounts, an increase of 14% year over year. The company is the CTV leader, with a 51% market share as of the third quarter. Even assuming CTV penetration has reached 300 million households worldwide -- an estimate that looks too high -- there would still be massive space in the streaming industry.
There are 1 billion broadband households worldwide, so there is plenty of room for Roku to add to its active accounts. But the company can also grow by increasing viewing hours -- the sky's the limit in this category. Even in more penetrated streaming markets like the U.S., streaming still accounts for less than 40% of television viewing time.
The more people spend time on Roku, the more streaming's share of television time will rise, and the more attractive the company's ecosystem becomes to advertisers. That's a display of Roku's network effect, as the value of its platform increases with use. Last year, the company's total viewing time crossed the 100 billion mark. Though Roku still isn't consistently profitable, its growth opportunities and leadership in the CTV market make its prospects attractive.
An excellent pick for the long-term
As of this writing, Roku's forward price-to-sales ratio is about 2.4. For context, anything less than 2 is usually considered good. Roku's forward P/S is only slightly above that, so the company doesn't look particularly overvalued by this metric. That's especially true for investors looking beyond the next five years. Sure, Roku could remain highly volatile and vulnerable in the short run, as many of the best stocks often are.
But the tailwind it is riding should help craft a different story over the next decade. While dozens of streaming platforms are currently battling for supremacy, Roku doesn't care which one rises to the top since most of the most prominent ones are available on its platform. It also matters to Roku that streaming continues to grow, and there is every reason to believe it will.
Meanwhile, advertising dollars should continue to shift to streaming, which should help the company's financial results move in the right direction. So, interested investors should take advantage of Roku's failure to keep up with the market over the past year to buy shares of the company. It could prove to be a great move down the road.
