The coronavirus pandemic has undoubtedly been a boon for streaming stocks. Consumers stuck at home needed ways to keep themselves entertained, and what better way to satisfy that need than to turn on the TV and watch their favorite shows and movies?
In the same vein, Year (YEAR 4.32%) stocks have soared 148% in 2020. But after peaking in July 2021, it’s a whole different story as the stock has fallen 88% from its all-time high.
Should investors buy Roku stock right now in the midst of market weakness? Here’s why now might be the time to press play.
Roku has two lines of operation. One is the platform segment, which includes high-margin advertising and subscription sharing fees. The other is the Player segment, where sales of media keys reside. The Platform segment accounted for 88% of the company’s revenue in the third quarter, with the remaining balance going to the Player segment. That hasn’t always been the case, as Roku generated 53.9% of hardware sales five years ago.
The company’s media dongles allow consumers to see all of their diffusion content in one place, especially valuable now that the number of choices is limitless. And on Roku’s platform, businesses big and small can use a product called OneView to manage their ad spend to target Roku viewers.
Roku delivers significant value to its viewers, third-party content companies, and advertisers. And the bigger Roku grows, the more inscrutable its competitive positioning becomes. Having more active accounts, now at 65.4 million, attracts streaming services that want to increase their number of subscribers. And more accounts mean more hours streamed on Roku’s platform, at 21.9 billion last quarter, translating into an expanding trove of data that’s incredibly valuable for businesses looking to allocate advertising expenses. It’s a powerful flywheel that’s hard to stop.
And if we zoom out, we’ll see that Roku is following a broad secular trend that should benefit it for years to come. According to data from Nielsenstreaming surpassed traditional cable television in terms of viewing time in the United States in the month of July, as more and more people began to realize how affordable and better the consumer experience in streaming is.
With a clear value proposition for users, coupled with the strong underlying tendency for households to drop old cable subscriptions, Roku is in a competitive advantage.
Nevertheless, the company cannot avoid the current state of the economy. In each of the past six quarters, the gamer segment has experienced a decline Gross marginwhich means Roku is losing money on every device it sells. Inflation in the economy as a whole drove up the costs of inputs and raw materials, but management decided not to force customers to pay higher prices. As long as active accounts continue to grow, as they have been, Roku is in good shape as it is able to monetize these accounts with its platform.
Additionally, the digital advertising market is slowing significantly, which is unsurprising given that many financial experts believe a recession is on the horizon. In times of economic uncertainty, marketing expenses can often be the first item to cut. Leadership teams don’t see the need to spend on marketing when consumers and the economy are struggling.
The management team is forecasting revenue of $800 million in the fourth quarter, equivalent to a 7.5% decline year-over-year. For what many consider a growth stock, this is not a positive outlook.
But despite macroeconomic headwinds and slowing growth, investors could consider buying Roku shares right now, which are trading at a price/sales ratio of only 2.5, almost the cheapest they have ever been. Every other company is facing inflation and a weaker economy, which should give investors reassurance that Roku’s long-term potential hasn’t really changed.
Additionally, the company currently has $2 billion of cash and cash equivalents on its balance sheet, compared to total liabilities of $1.6 billion. This strong balance sheet and financial position should ease investor concerns as Roku is more than prepared for a potential major economic downturn in the coming quarters.
The long-term outlook hasn’t changed, but the stock price has. Smart investors should jump at the chance to pick up Roku stock on the cheap right now.
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