Insights

If You Own This Stock, It’s Time to Buy More

With the market rout that has taken place since last November, many once high-flying tickers have come crashing back to Earth. It’s no doubt a difficult time for investors, seeing their portfolios in the red. But it’s also an opportune time to reassess the investment cases for your various holdings. A cheaper stock might warrant more capital being put behind that idea. 

In that vein, I believe there is one business, whose shares are down 64% in 2022, that investors need to pounce on now. If you already own Roku (NASDAQ: ROKU), now is the time to buy more of this streaming stock. 

Don’t worry about the hardware 

The common misconception about this top streaming company is that it is still mainly just a hardware business that sells media sticks you plug into your TV. While this segment did represent 11.8% of overall revenue in the most recent quarter, this figure is far lower than it was just a few years ago. Roku generates the vast (and growing) majority of sales from its Platform segment, which includes high-margin advertising and subscription revenue. 

Unsurprisingly, investors have focused on the negative gross margin of Roku’s Player segment over the past four quarters as a sign that the business will never be profitable. However, ongoing supply chain issues and soaring inflation are the two primary culprits. And these problems aren’t specific to Roku; they are concerns plaguing the rest of the economy. 

What matters for Roku is that it continues to attract more users, something it continues to do with each passing quarter. Management is making the deliberate choice of not passing on higher input costs to consumers, resulting in a negative gross margin, all with the intention of attracting new accounts. Once these issues subside, Roku’s profitability should continue heading in the right direction. 

Best pure-play streaming stock 

With Netflix expected to lose 2 million subscribers in the current quarter, investors are starting to question the investment merits of the streaming industry. But I believe that Netflix’s struggles, and its intention to introduce an ad-supported tier, actually benefit and make Roku the best pure-play streaming stock investors can own. 

For Roku, it doesn’t matter which of those unlimited number of streaming services out there attracts the most subscribers. As long as consumers continue ditching their cable TV subscriptions and move to streaming, Roku stands to gain. According to eMarketer, less than half of all U.S. households will have a regular cable subscription by the end of 2023. 

Another important trend to understand is that with more eyeballs moving to streaming, advertisers will follow. Ad spending on linear TV in the U.S. will be roughly $68 billion this year. But by 2030, it is forecast that ad spending on connected TV, which Roku specializes in, will increase to $100 billion. Roku’s 61.3 million active accounts (up 14% year over year) watched 20.9 billion hours of content last quarter. That’s an attractive target audience for big advertisers. 

Cheaper valuation 

What makes Roku even more attractive from an investment perspective is that the stock currently trades at a price-to-sales multiple of just four, far below the five-year historical average of 13. It’s a safe assumption that the pessimism surrounding Roku shares, as well as many other high-growth tech stocks, is extremely high right now. 

Even with tough year-ago comparisons, Roku continues finding ways to grow its revenue and user base. In fact, management reiterated guidance for 35% year-over-year sales growth in 2022. And over the next five years (from 2021 through 2026), Wall Street consensus analyst estimates call for revenue to increase at a compound annual growth rate of 23.3%. 

Roku was doing well before the pandemic, thrived during it, and still has an incredibly bright future as we look out over the next decade. Streaming entertainment is only going to get more important in our daily lives, and Roku is well-positioned to capitalize on this trend. Investors should take advantage of the stock’s weakness and buy now. 

Neil Patel has positions in Roku. The Motley Fool has positions in and recommends Netflix and Roku. The Motley Fool has a disclosure policy.

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