After dropping 82% in 2022, Roku (ROKU -3.57%) shares have outperformed the market this year, rising some 50% through late October. There seems to be more optimism now surrounding the streaming platform.
And thanks to recent developments, the stock could climb further. Leading streaming service Netflix reported strong subscriber numbers for the three-month period that ended June 30. Investors likely hope that Roku will also impress Wall Street when it announces its third-quarter financials on Nov. 1.
Yet, while it’s easy to get caught up in the short-term momentum, it’s best to take a step back and focus on attributes that make a company a smart investment over the long haul. Here are three reasons this streaming stock looks like a no-brainer buy right now.
Secular trend
The internet has had a huge impact on the economy. One notable reason is how it’s changing the way consumers view video entertainment. In other words, streaming is becoming increasingly popular.
According eMarketer, by the end of this year, fewer than 46% of households in the U.S. will still have traditional cable-TV subscriptions. And this so-called cord-cutting trend is set to continue in the decades ahead. That’s because streaming provides a better experience for customers, with lower prices, a bigger selection, and the convenience of watching whenever you want.
Roku is an agnostic platform, allowing consumers to access all of their favorite content from every different streaming service provider in one single interface. Naturally, as streaming becomes more popular, Roku finds itself as a top choice for households to aggregate their subscriptions. In fact, it already has top market share in the U.S. And there are currently 73.5 million active accounts using the platform.
This puts Roku in a prime position to keep benefiting with the growth of internet-based video entertainment.
Network effects
Roku connects viewers with all of their favorite content. Plus, Roku allows advertisers who are looking to target this audience with a way to reach them in a connected-TV environment. Consequently, an argument can be made that Roku’s business model is underpinned by powerful network effects. This is what makes up the company’s economic moat, a key trait that allows Roku to fend off rivals in the industry.
If Roku is able to add more accounts, then content companies will want to offer their services on the platform. And this will then make Roku more valuable to existing and prospective accounts because there will be more stuff to watch.
And as more engagement occurs on Roku, advertisers will want to direct their marketing expenses to Roku. Accounts streamed a total of 25.1 billion hours last quarter, a clear sign of this engagement.
Cheap valuation
Even though Roku’s stock has bounced back nicely in 2023, it’s still 87% below its peak price, which was set in July 2021. Shares trade at a price-to-sales (P/S) multiple of 2.7. That’s about 75% cheaper than their historical average P/S ratio of 10.4.
What’s interesting is that even though the stock has gotten crushed in the past couple of years, it has still been a wonderful investment, rising 161% since its initial public offering in late 2017. That performance trounces the 104% gain of the Nasdaq Composite.
It’s better to buy a stock at a lower valuation, all else equal, as it indicates that there is more upside to the valuation should the company achieve success going forward. But investors who are looking to buy the stock now need to understand that the near term is still uncertain, primarily as it relates to macroeconomic headwinds.
Nonetheless, these three reasons are compelling enough for any investor to want to scoop up some Roku shares right now.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Roku. The Motley Fool has a disclosure policy.
