Market makers haven't been kind to media-streaming technology expert Roku(NASDAQ: ROKU) in 2024. Entering the year at an 81% discount from its all-time highs in 2021, Roku's stock has dropped another 45% lower year to date.
Is it time to give up on a recovery that never seems to come, or is Roku only more spring-loaded for a massive comeback?
Evaluating Roku's growth prospects
First and foremost, let's see if there's any evidence that Roku is running out of growth prospects. The company reported second-quarter results last week, so there's fresh data to work with. How well is Roku's business running?
- The company added 2 million streaming households in the second quarter, for a grand total of 83.6 million active customers.
- Platform revenue, which accounts for Roku's ads, original content, and other services, grew 11% year over year to $824 million.
- Devices sales, which represent the company's branded hardware, jumped 39% higher to $144 million.
- Roku recorded a $71 million loss from operations, up from a $126 million operating loss in the year-ago period.
- Cash from operations landed at $332 million, or 34% of revenue. In the same quarter of 2023, Roku generated just $15 million of cash-based operating profits.
Every metric came in above management's guidance targets and Wall Street's consensus estimates. Looking ahead, Roku's management expects net losses to continue shrinking in the next quarter, while total revenue should pass the billion-dollar mark.
I don't know about you, but Roku sounds pretty darn healthy to me. The business trends look pretty great in charts, too:
ROKU Revenue (TTM) data by YCharts.
Why Roku's stock chart isn't reflecting its business growth
If Roku's business is growing and healthy, why is the stock taking swan dive after swan dive? I'm breaking a sweat just watching the company dropping deeper and deeper despite rising sales and robust cash profits.
The standard answer used to be that Roku's ad business was struggling. Then, some would argue that the company faces too much competition to make it big on the global stage. Giants like Amazon and Alphabet (formerly Google) present a threat in every geographic market, and some smart TV builders don't need Roku because they have their own software platforms.
But those bearish arguments don't make a lot of sense anymore.
Roku is showing solid growth in services and even heftier gains on the hardware side. Lots of people are buying the company's products and services, despite a plethora of alternative solutions for video-viewing experiences. As always, devices rival Vizio(NYSE: VZIO) is growing slower than Roku with negative cash flow, which suggests that retail giant Walmart is spending $2.3 billion on an unpopular Roku alternative.
I'm not buying the argument that Vizio's modest buyout price should lead to lower valuation ratios for Roku. The two companies operate in entirely different classes in terms of business growth, product quality, and popularity. One of these media-streaming companies is not like the other.
Yep, Roku stock is still a great buy!
I'm sorry if you still feel like Roku's plunging price drop doesn't make any sense. I agree wholeheartedly. You just saw my best effort at explaining why market makers disagree, and it's kind of hard to type that stuff with a straight face.
In my eyes, Roku was a rock-solid buy at the start of 2024. It's only more attractive right now. The stalled ad sales are picking up, Roku devices are flying off the store shelves, the company is expanding internationally, and putting Vizio under Walmart's control doesn't look like a real threat.
I find it hard not to buy more Roku stock every time I have some spare cash to invest. Your mileage may vary, but you should at least consider taking a small position in this incredibly undervalued growth stock.
I don't know when Roku's stock chart will turn northward again, but it has to be a matter of time. It would be a shame to be left empty-handed when the market suddenly realizes that Roku was doing more than just fine all along.
Should you invest $1,000 in Roku right now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund has positions in Alphabet, Amazon, and Roku. The Motley Fool has positions in and recommends Alphabet, Amazon, Roku, and Walmart. The Motley Fool has a disclosure policy.
