With the S&P 500 up 9% this year and at an all-time high, the bargain bin is getting sparser. That's the way the market works; when investors hesitate and prices go down, the market gets flooded with cheap stocks. But you have to be able to calm your nerves and stay confident in the market to invest your money when the market is down. Warren Buffett is famous for advising investors "to be fearful when others are greedy and to be greedy only when others are fearful."

Many stocks are climbing this year, lifting the market, but not all. Streaming stock Roku (ROKU 4.00%) is down about 33% year to date, and it looks like a great opportunity to grab a bargain stock on the dip. Here's why.

Roku has a unique streaming model

Roku operates a two-sided model with a streaming platform and a hardware business. It's the top streaming operating system in the U.S., Canada, and Mexico. That means that it has more people buying its streaming devices and setting up streaming accounts through its platform than its competition, including Amazon.

The device segment houses streaming equipment, including streaming-enabled screens and devices that connect screens to the internet, and the platform business is mostly advertising for Roku's free channels.

Both of its segments performed well in the recent 2023 fourth quarter. Platform revenue, which accounted for 84% of the total, increased 13% year over year, while device revenue increased 15%. As you might expect, the platform business has higher margins while the device segment has been reporting gross losses.

Because the platform segment is so much larger, total gross margin has been strong and increased 2.5 percentage points year over year to 44.5% in the fourth quarter. However, results were less rosy closer to the bottom line. Roku's operating loss fell by 58% over the past year to $104 million in the fourth quarter, but that's still hefty.

The long-term thesis looks compelling. As more viewers move over from cable and broadcast TV to streaming, Roku is well-positioned to benefit. According to Nielsen, which tracks TV and viewing statistics, broadcast TV viewing hours fell 16% year over year in the 2023 fourth quarter, while Roku's viewing hours increased 21%. Roku's streaming hours per active account per day was 4.1 in the fourth quarter, up from 3.8 in 2022 and 3.6 in 2021. Average viewing time on broadcast TV was 7.5 hours per day in the U.S. in the fourth quarter, but Roku's share is growing, and that trend should continue.

These numbers are important because advertisers follow the viewers to make the most out of their budgets. That directly impacts Roku's ability to generate higher sales. In 2023, adults age 18 to 49 in the U.S. spent more than 60% of their viewing time on streaming, while advertisers spent only 29% of their TV ad budgets on streaming. That gap presents a massive opportunity for Roku to grow its business.

Why is Roku stock down?

It's taking a long time for Roku to become net profitable. It briefly reported net profits early in the pandemic when there was a huge and quick shift to streaming, and that indicates that Roku can become profitable at scale. But while the numbers continue to increase, Roku hasn't been able to scale without correspondingly increasing expenses. Management has made it a goal to reduce spending, and it's making progress.

Despite what was a solid earnings report, investors dumped Roku stock after the report. Revenue guidance for the first quarter was positive at 14% year over year, but management does not expect any adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) after two quarters in the black. Gross profit is expected to increase just 9.6% over last year, and the net loss is expected at $90 million. While that's a huge improvement from a $190 million loss last year, it's still far above $23 million loss in 2022 -- and certainly way worse than the $76 million profit in 2021.

Compounding that, just a few days later Walmart announced that it would acquire Vizio, a smaller but competing operating platform. Most likely the purpose of that acquisition is to compete with Amazon's advertising business, but having the Walmart brand behind a competitor's name just made investors feel more negative about Roku. This looks like an overreaction. With Roku holding its own against a name as big as Amazon, it shouldn't feel too much of an impact from the Vizio acquisition.

At the current price, Roku stock trades at a price-to-sales ratio of only 2.5. That's a bargain for a stock with loads of potential. Roku is the future of TV and streaming, and this looks like an opportunity to buy on the dip.