Media-streaming technology expert Roku(NASDAQ: ROKU) was a market darling a few years ago. The lockdowns of the early coronavirus pandemic created a perfect environment for digital streaming services, and the leading provider of viewing platforms was another slam-dunk winner at the time.
I agree that Roku's stock soared to unsustainably high levels in back then, reaching $480 per share in the summer of 2021. Share prices are down 86% from that peak, including a 30% drop in 2024 alone.
Where will Roku go from here? Is it a stunted has-been or an undervalued growth story?
"Up" isn't the only way
I have expected Roku to break out of this slump for years already, but the triumphant recovery keeps sliding further away.
- For a while, Roku's slowing revenue growth was a pretty accurate predictor of what the stock chart would do next. After accelerating to impossibly rapid growth rates in 2020 and 2021, Roku's top-line growth came back to earth and so did the stock price.
- By the time Roku's sales hit the gas pedal again, bearish investors had moved their focus to negative earnings.
- Then, retail colossus Walmart(NYSE: WMT) entered the streaming platform arena by placing a buyout offer for smart TV maker Vizio(NYSE: VZIO). The deal would remove Roku's software from Walmart's store brand TVs while putting a deep-pocketed rival in the same market sector. Moreover, Walmart's $2.3 billion buyout bid works out to 1.3 times Vizio's trailing sales, making Roku look expensive at roughly three times that ratio when the buyout was announced.
Some investors still think Roku looks expensive at 2.7 times sales, based on direct comparisons to the low-priced Vizio buyout.
So Roku's stock experienced brief periods of positive energy in 2023, but the overall trend remains undeniably bearish.
Roku's slump-swatting catalysts
I see several misunderstandings in Roku's current stock market situation. They may look modest separately, but they add up to a robust investment thesis.
- Roku deserves a higher price-to-sales (P/S) ratio than Vizio because it is a much better business. Roku's sales are growing again while Vizio's are shrinking. Roku has $2.1 billion of cash on hand and zero dollars in long-term debt. Vizio's balance sheet is also debt-free but shows just $334 million in cash. The two companies are nothing alike and Roku should trade at much higher valuation ratios.
- Did I tell you that Roku's sales are growing again? The growth rate has averaged 15.5% over the last 5 quarters while Vizio's revenues fell by a quarterly average of 0.3% instead.
- Roku's sales slowdown sprung from a weak digital advertising market, which in turn resulted from the inflation crisis. Why spend big money on ad campaigns when no one is ready to buy your stuff, right? Judging by stronger results from online advertising giants such as Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL) and Snap(NYSE: SNAP) in recent quarters, ad buyers are reaching for their wallets again. A full return to healthy ad spending should lift Roku out of this muddy trough.
I could go on with a few milder business catalysts. Roku is making some exclusive content now, striking fresh ad deals around custom buildings in its popular Roku City screensaver, and adding millions of active users in every quarterly report.
In my view, Roku's shares are spring-loaded for a fantastic upswing. It may not happen in 2024 or even next year, but there's no stopping the catalysts I listed above. The media-streaming industry is a notorious breeding ground for deeply held misunderstandings and Roku's low price is just the latest example of this trend. It won't last forever, and I'm happy to have the option of buying more Roku shares at a discount right now.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anders Bylund has positions in Alphabet and Roku. The Motley Fool has positions in and recommends Alphabet, Roku, and Walmart. The Motley Fool has a disclosure policy.
