Roku, a company known for its innovative media-streaming technology, has experienced significant fluctuations on Wall Street. As of April 23, Roku’s stock is trading 36% below its annual peak and 87% down from its all-time high in the summer of 2021.
Despite this decline, Roku’s growth trajectory remains strong. The company has prioritized expanding its market reach and sales growth over short-term profits in recent years. Many investors have focused on the declining bottom line, overlooking the increasing revenue trend. Consequently, Roku’s stock is currently valued at a notably low price, presenting a potential buying opportunity for investors.
Roku’s stock is trading at 2.2 times its trailing sales, a valuation more typical of mature, slow-growing businesses. For instance, both The Home Depot and Starbucks have similar price-to-sales ratios. These companies are respected investments due to their strong dividend policies and focus on generating substantial cash profits for shareholder returns.
Roku differs from these companies as it emphasizes revenue growth and expanding its global market presence. Although the company faced challenges during the inflation crisis of 2022, it continues to grow faster than Starbucks and Home Depot. Roku’s impressive sales growth has involved increased research and development spending and aggressive sales and marketing efforts. These strategies have initially lowered gross margins, as Roku offered its media players at low prices to attract cost-sensitive customers.
Currently, Roku is expanding into international markets and the digital advertising sector. However, given the uncertain economic conditions, it may take time for Roku’s advertising business to significantly contribute to profits.
Investors should consider Roku’s accelerating revenue growth and robust American business, which provide a solid foundation for international expansion. Though Roku doesn’t yet match Netflix’s market cap ambitions, the stock appears undervalued based on current valuation ratios.
Roku represents an attractive long-term growth investment opportunity, situated in a growing global market. Investors should be mindful of potential volatility and consider strategies such as buying in thirds or dollar-cost averaging to mitigate risk. Monitoring the price-to-sales ratio is important, as Roku’s stock is arguably more aligned with companies like Netflix rather than Home Depot and Starbucks in the long run.
