3 Reasons Roku Stock Could Crush the Market for the Next Decade

Streaming company Roku (ROKU -3.01%) is one of those growth stocks that ballooned up during the last bull market, partially deflated in 2022-2023, but hasn’t come close to recovering from the fall, despite the S&P 500 cracking new all-time highs.

Shares still trade down over 80% from their former peak, so it’s been a painful few years if you bought the stock back then. However, the future might be as bright as ever for the company.

There are three key reasons why this stock will outperform the broader stock market over the upcoming decade. It’s a trifecta of good news that could launch the stock from its depressed prices.

Here are the details you need.

1. Roku’s account growth is strong and still running hot

For those who don’t know, Roku is a streaming platform with two primary business units. First is the hardware business, which includes the dongles, speakers, and televisions it sells under the Roku brand. Then, the platform business generates advertising revenue and fees based on everything Roku users watch on their devices, including Roku’s free on-platform streaming service, the Roku Channel.

The platform unit is much bigger, so when the ad business struggles, it can impact Roku’s overall performance. Ad spending was significant during the pandemic years when consumers’ discretionary income was higher, but brands later pulled in spending due to inflation and recession concerns. You can see Roku’s revenue growth go up and down over the past several years:

ROKU Revenue (Quarterly YoY Growth) data by YCharts

There are two vital takeaways here for investors. First, while revenue growth stagnated, Roku continued growing its user base. Active users have increased from 39.8 million in Q1 of 2020 to 75.8 million in Q3 of 2023. Secondly, revenue growth has increased because the broader advertising industry began warming back up over the past six months.

2. Industry tailwinds are still favorable

You might already be aware that traditional cable is on the decline. Entertainment and TV have become a question of which streaming services you subscribe to, not who your cable provider is. Roku is essentially a TV operating system. Roku doesn’t care that you watch Netflix — just that you’re watching Netflix on a Roku device.

According to Pixelate, Roku has an approximate 50% market share of smart TVs in North America and is expanding internationally in regions like Latin America.

Notably, the shift in eyeballs is now swaying ad dollars to shift from traditional broadcast channels to these streaming platforms. That’s good for streaming ad platforms like Roku’s. According to a report by Fortune Business Insights, programmatic ad spending, like what Roku sells, will grow from $21 billion to $114 billion by 2030. Roku’s market share positions the company to ride these tailwinds.

3. Roku’s building a robust advertising business

Interestingly, Roku sells its devices at virtually zero profit to get users on its platform. Why? It ultimately boils down to the first-party data Roku gains when you use the platform. Roku tracks your activity and can turn around and monetize it.

Suppose you’re a company that wants to advertise your men’s shampoo product. You buy ads on Roku. Roku has the data to ensure your target customers (likely younger males in this case) are the ones most likely to see your ad and give you insight into the ad’s reach, who engaged with it, and more.

Roku is also innovating with new ad technology. It began testing ads that viewers could directly purchase products from. It partnered with Walmart to allow viewers to click on an ad with their remote and add the item to a cart, check out using Roku’s stored payment data, and complete a transaction without removing a viewer from the content they were watching.

Having this data and control over the TV’s interface gives Roku a lot of insight and control of its viewership, which makes it a very appealing partner for advertisers.

The stock is a bargain

Despite Roku having more customers and data than ever and a substantial market share, the stock is still a fraction of where it once traded. The stock’s price-to-sales ratio (P/S) is just over 3, near the low end of where the stock’s been valued since going public in 2017.

ROKU PS Ratio Chart

ROKU PS Ratio data by YCharts

It’s hard to see the stock staying down if Roku keeps growing its user base and its advertising business with it. The stock is currently being treated like its growth days are over. Still, given the bright future of connected and smart TVs and Roku’s position, it seems like an opportunity to grab a future winner at a discount today, a winning combination for excellent investment outcomes.

Justin Pope has positions in Roku. The Motley Fool has positions in and recommends Netflix, Roku, and Walmart. The Motley Fool has a disclosure policy.

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