Roku (ROKU 3.32%) once redefined streaming for many households. The high-flying growth stock of 2020 and 2021 has seen its share price plunge from the pandemic-induced peak, currently sitting 87% below the record prices of July 2021.
If you're searching for potential bargains at the crossroads of technology and consumer services, Roku's dramatic price drop could catch your roving eye. Past performance is no guarantee of future results, but this steep discount presents a bargain-priced entry point for those who believe in the company's fundamentals and long-term strategy.
In my view, Roku's long-term business prospects are stronger than ever. In fact, the stock should appeal to die-hard value investors in many ways, even though Roku still chiefly appeals to growth-stock chasers. So let's take a deeper look at Roku's current market position, financial health, and future prospects to understand whether this dip represents a buying opportunity or a signal to tune out.
NASDAQ: ROKU
Key Data Points
Is Roku the deal of the day?
I'm not kidding. Roku looks downright cheap in many ways.
The stock trades at just 2.7 times sales nowadays, or 4.1 times the company's book value. If you're looking for deep cash reserves, Roku shares are changing hands at 4.6 times its cash equivalents on a pristine balance sheet with zero dollars of long-term debt.
So the company is cash-rich, debt-free, and ready to make heavy investments in promising ideas and operations. At the same time, the stock price would be more appropriate for a slow-growing player in mature industries like industrial materials or telecom services.
Roku's wallet is wide open, financing tomorrow's growth
So far, Roku looks like a low-priced value stock. But that's not the whole story.
The company is also pulling many effective levers to support current and future growth. For example, Roku's annual research and development (R&D) budget increased by 90% over the last two years. Sales and marketing costs soared 127% higher in the same span.
Roku also held its product and service prices steady at a time when most rivals passed on higher expenses to their customers. The resulting combination of stalled gross margins and soaring operating expenses drove bottom-line income into negative territory in the summer of 2022.
ROKU Revenue (TTM) data by YCharts
So you could see Roku's lower gross profits as another type of marketing expense in recent years. The company bore the brunt of rising business expenses while others contributed to the inflation issue with higher prices. Together with those soaring R&D and marketing efforts, Roku's business has been growing in the middle of a global economic downturn.
Roku's recipe for recession resilience
Roku ended 2021 with 60 million active accounts and $2.7 billion of full-year revenues. Two years later, the account collection rose to 80 million names and annual sales jumped to $3.5 billion. Not too shabby while knee-deep in an inflation-driven market slump, right?
Moreover, the bottom-line pressure is fading. In February's fourth-quarter report, Roku's bottom-line figures moved upward for the first time since the fall of 2021. At the same time, annual sales rose 8% year-over-year and the full-year free cash flows solidified at $173 million.
In other words, Roku's growth strategy is paying dividends and I can't wait to see the financial results soaring when the world economy finally gets back on its feet.
Media-streaming services are taking the entertainment world by storm, and every cord-cutting digital streamer is a potential Roku customer. Despite intense competition from world-class technology companies like Samsung, Amazon, and Google, Roku holds a dominant market share among streaming devices in North America. It's also a leading player in Latin America and Western Europe, with a global expansion effort in the works.
Roku is my favorite buy right now
Yet, market makers are shrugging off Roku's rich potential for long-term upside, distracted by an ever-changing competitive landscape and the current lack of bottom-line profits.
I think that's a big mistake. Roku's business is running just fine, delivering growth where it matters. Negative earnings look painful at first glance, but management has the situation under control and could generate net profits anytime by shifting away from this expensive growth strategy.
And I hope they don't do that for years to come. The untapped long-term market opportunity is too big to ignore. The Roku shares you buy at today's bargain-bin price should make a lot of money as the streaming entertainment industry evolves over the years.
