The stock market has been in rare form since early last year. All the major market indexes have entered bull market territory, rising over 20% from their respective lows and reaching new all-time highs. However, not all stocks have participated equally. Take Roku (ROKU -0.39%), for example. The streaming pioneer has gained roughly 59% since the beginning of last year but is still 86% off its peak.
Yet a review of the evidence suggests there are plenty of reasons to like Roku, despite its spectacular fall from grace. Let’s look at three reasons investors should be buying Roku stock like there’s no tomorrow.
Image source: Getty Images.
1. Strong and improving user metrics
Even as the economic downturn weighed on Roku stock, one thing that never wavered was the company’s resilience. In the fourth quarter, Roku reported revenue that increased 14% year over year, which marked the third consecutive quarter of sequential growth. Furthermore, the company’s campaign of cost-cutting continues to bear fruit with positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and free cash flow last year. Those milestones came in “ahead of schedule,” according to management.
Yet it was Roku’s user metrics that really stood out. Roku added 10 million active accounts during the year, bringing the total to 80 million, an increase of 14%. Viewing hours jumped as well, climbing to 29.1 billion hours, up 21%. That means Roku users are watching nearly four hours of programming per day, a number that also increased 21%. By contrast, viewing on traditional broadcast television declined 16% year over year, according to Nielsen.
Despite weakness in the stock price, Roku’s audience has only been growing larger and more engaged with its platform.
2. Market-leading scale
When it comes to streaming platform providers, Roku is without equal. In the connected TV (CTV) advertising market, Roku has a 55% share in North America, according to CTV analytics provider Pixalate. Roku also has the lead in Latin America with a 45% market share, though it lags in Europe, the Middle East, and Africa (EMEA) at 23%, behind Amazon Fire TV’s 30% and Samsung’s 24%.
Roku’s industry-leading position puts it in the sweet spot to attract viewers who abandon cable, a trend that’s accelerating with each passing year. The major pay-TV providers lost more than 5 million subscribers in 2023, up from 4.6 million in 2022, according to data compiled by Leichtman Research Group. Furthermore, fewer than 46% of US households subscribed to cable last year, and that’s expected to fall below 35% by 2027, according to Insider Intelligence.
The company’s focus on being the premier streaming delivery medium means Roku bypasses the massive content spending that now weighs on each of the major streaming services. Furthermore, the trend toward ad-supported streaming services plays right into Roku’s advantage as the company earns the right to fill 30% of the advertising inventory — while collecting 100% of the revenue from that portion — on streaming channels that show ads on its platform.
3. Digital advertising recovery
The past couple of years have been difficult for advertisers as marketing budgets are among the first things to be cut during times of economic uncertainty. The good news is that digital advertising is finally making a comeback, and its growth could even accelerate in 2024. More importantly, programmatic ad spending — which includes CTV — is expected to grow three times faster than nonprogrammatic spending this year, rising roughly 16%. As the leading provider of CTV advertising in the U.S., Roku is well positioned to profit from this trend.
It’s worth noting the lion’s share of Roku’s revenue, or roughly 86%, comes from its platform segment, made up primarily of the digital advertising shown on its platform. Furthermore, Roku collects all the ad revenue from The Roku Channel — the company’s homegrown streaming channel — which has become a top 10 streaming channel in the U.S.
Bonus reason: A bargain-basement price
The uncertainty of the past couple years has weighed on Roku stock. However, seasoned investors know that business performance and stock price aren’t always in sync. That appears to be the case with Roku. As a result, Roku stock is selling for just 2 times forward sales estimates — the very definition of an undervalued stock.
The dirt-cheap valuation, combined with Roku’s robust user metrics, market-leading position, and the ongoing rebound in the digital ad market, makes a compelling argument that investors should be buying Roku stock like there’s no tomorrow.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Amazon and Roku. The Motley Fool has positions in and recommends Amazon and Roku. The Motley Fool has a disclosure policy.
