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3 Reasons Roku Stock May Be a Buy

It’s been a brutal year for Roku (NASDAQ: ROKU) investors to say the least. Shares have been absolutely pummeled, with the stock price falling more than 60% year to date. Zooming out over the past twelve months, the stock has lost more than 75% of its value. Ouch! 

While the benefit of hindsight suggests the stock’s valuation may have, indeed, gotten ahead of itself, there’s good reason to believe that its subsequent pullback may have gone too far.

Here are three specific reasons why investors should be seriously considering buying shares of this growth stock today.

1. The valuation is starting to look cheap

On the surface, Roku may look expensive at 88 times earnings. But investors should remember that this is a true growth company. The streaming-TV platform specialist deserves to trade at a steep premium. Consider that Roku’s trailing-12-month revenue of $2.9 billion compares to just $1.8 billion at the end of 2020 and $1.1 billion at the end of 2019.

Further, Roku continues to grow fast today. First-quarter revenue increased 28% year over year. This is particularly impressive because some marketers have limited their ad budgets recently as companies deal with challenges associated with limited supply; why increase ad spend when there’s not enough supply to meet growing demand?

Further, investors should note that it’s likely that Roku’s earnings will grow faster than revenue over the next five years. It was only recently that the company’s scalable business model crossed into profitability. As revenue continues to grow, it’s likely that Roku’s net profit margin will expand meaningfully, leading to outsize earnings growth in the coming years. There will, of course, be some lumpiness quarter to quarter. But there’s a good chance that Roku’s net profit margin improves substantially over the next five years.

To this end, analysts (on average) expect Roku’s earnings per share to compound at a rate of 43% annually over the next five years. Earnings growth like this would likely more than justify the stock’s current valuation.

All of this to say: a price-to-earnings ratio of 88 is likely a good deal for Roku stock.

2. Roku expects a strong second half of 2022

Investors should also note that Roku expects a substantial acceleration in its top-line growth in the second half of the year. After growing revenue 28% year over year in Q1, management guided for 25% top-line growth in Q2 but 35% growth for the full year. This strong outlook, management explained in the company’s first-quarter earnings call, is due to the fact that the company has easier year-over-year comparisons in the second half of the year.

3. Connected TV is in its early earnings

Finally (and probably most importantly), investors should keep in mind that Roku is still in the early innings of the connected TV opportunity.

“We believe that these near-term headwinds are dwarfed by the long-term opportunities in the secular shift to TV streaming and TV OS consolidation,” said Roku management in the company’s first-quarter letter to shareholders.

To this end, eMarketer recently estimated that total TV ad spend in the U.S. this year will come in at about $87 billion. But only $18.9 billion of this sum is expected to go to connected TV, despite streaming TV’s reach in the U.S. recently surpassing traditional TV’s reach. 

While there’s no telling where the bottom is for Roku stock, there are good reasons to believe this is a good time for investors who are willing to hold the stock for the long haul to buy shares and get in on this massive streaming-TV opportunity.

Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.

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