If you're a growth investor, you're likely struggling to find compelling deals in this market. The S&P 500 is up 10% so far in 2024 after having soared last year, and that rally has been even more pronounced in the high-growth tech space.
Many stocks that had been pummeled in 2022 are rebounding now that Wall Street is feeling better about the prospects for the economy and interest rate trends. But Roku (ROKU 5.90%) has been left out of that recovery. The streaming stock is down nearly 30% year to date.
Don't let that slump scare you away from this attractive business. Sure, Roku isn't nearly as established as Netflix (NFLX 0.73%), which is generating ample cash flow and excellent profits right now. In contrast, Roku recently announced a second straight year of net losses in 2023.
But investors should still consider owning Roku stock following its recent pullback. Here's why.
Great engagement
Roku has a unique operating model that's still in the process of building up its monetization strength. The main challenge is that the company gets most of its earnings from advertising spending, whereas streaming video rivals like Netflix and Disney+ focus more on paid subscriptions.
The former approach hasn't been profitable lately because digital advertising rates slumped through most of the past year. Yet Roku is having no trouble on the engagement front. Streaming hours rose 20% in 2023 to cross 100 billion. The company added 10 million active users last year and now has 80 million accounts (compared to Netflix's 260 million subscribers).
NASDAQ: ROKU
Key Data Points
It wasn't easy to monetize that expanding audience last year, but that's likely just a temporary challenge. Zoom out and you'll see lots of room for growth as more TV viewing tilts away from traditional broadcasting and toward streaming. Roku's average streaming time per day was 4.1 hours last year, for example, up from 3.8 hours in 2022. But the average daily TV time in the traditional broadcasting world is nearly 8 hours.
Growth over profits
Roku has decided to prioritize growth over short-term profits, and Wall Street was disappointed to see that the streamer can't achieve both goals right now. Operating losses expanded to a painful $800 million last year from $530 million in 2022. That metric might be enough to keep many investors away from this growth stock.
Look beyond the headline profit metrics, though, and you'll see encouraging signs of an earnings rebound on the way. Roku returned to positive free cash flow last year and management is forecasting positive earnings on an adjusted basis in 2024 as the company works to produce positive GAAP results in the coming years. "We plan to increase revenue and free cash flow and achieve profitability over time," executives said in a recent shareholder letter.
Looking ahead
Cautious investors might want to wait for signs of concrete progress on the profit front before buying the stock. The next few quarters could be volatile, with sales projected to rise about 12%, according to most Wall Street pros. If you believe Roku will find ways to monetize its growing user base, then you could see some great returns from buying the stock now while pessimism is elevated.
Shares are valued at less than 3 times sales compared to Netflix's price-to-sales (P/S) ratio of 8. It might be several years before Roku can meaningfully close that valuation gap. But patient investors should be happy to watch that story play out, assuming Roku can find ways to capitalize on its growing audience base.
