Media streaming technology expert Roku (NASDAQ: ROKU) has been a rollercoaster ride for investors in recent years. Despite a 41% share price decline since the beginning of the year (end of June 16) and just 2% above its 52-week low, Roku’s potential for a massive turnaround cannot be denied.
Down 89% from its all-time high in summer 2021, and the big question is: can this undervalued stock make you a millionaire one day?
The million dollar scenario
Let’s consider a scenario where you have $100,000 to invest in Roku today.
If everything goes perfectly and Roku experiences tenfold returns over the next 15 years, your investment would indeed return a million dollars. This would require a compound annual growth rate (CAGR) of about 16.5%. While this is ambitious, it’s not entirely out of reach for a company with Roku’s market potential and innovative lead in the media streaming industry.
Roku is a serial innovator, always hungry for new markets. With increasing streaming hours and expanding advertising capabilities, Roku is positioned to benefit from the growing digital media market in the long term. The global growth of the sector must eventually slow down, but global saturation is still a long way off.
However, for this optimistic scenario to become a reality, Roku would need to continue its growth trajectory, fend off competition and effectively monetize its user base. Can the company maintain its industry-leading performance for another decade and a half? Maybe, but maybe not. This is a risky idea if you define the success of the investment as “a million dollars or failure.”
Invest less? Here’s what you need to know
If you have less than $100,000 to invest, becoming a millionaire with Roku becomes even more challenging. The media streaming market should remain in a high-growth mode for longer, with Roku taking a leading position in the longer term. While Roku’s current valuation metrics, such as a price-to-sales (P/S) ratio of 2.2 and a price-to-free-cash-flow (P/FCF) ratio of 18.4, suggest that the stock is undervalued is, Roku’s long-term success depends on several external factors.
Realistically, a diversified investment strategy could make more sense for investors with smaller capital. Building a portfolio with a mix of growth stocks and stable investments, such as the leading S&P 500 trackers, can provide a balanced approach, reducing risk while still providing substantial growth potential.
Medium-term potential: double or triple your money
Can Roku double or triple in value in the next five years? This scenario seems more plausible. The stock’s current undervaluation could lead to significant gains as the digital media market recovers. A return to robust ad spending and continued growth in streaming hours could act as a catalyst for Roku’s stock price to rise.
A successful medium-term strategy with Roku requires close monitoring of market trends and a willingness to take advantage of short-term opportunities.
However, this approach differs from the slow and steady process of wealth building advocated by investing legends like Warren Buffett and John Bogle. While Roku’s returns could be impressive in the short to medium term, relying solely on a quick Roku blowout is a risky tactic. And you need a much larger initial investment to get to a million dollars this way.
Conclusion: Set realistic investment goals
Investing in Roku offers exciting opportunities, but it’s critical to set realistic goals based on your investable capital and time horizon. While a 10x return in 15 years is a compelling dream, it requires a perfect storm of pleasant market conditions and sharp execution from the company itself. More modest expectations, such as doubling or tripling your investment over the medium term, are more achievable given Roku’s current position and market potential.
Roku won’t be the golden ticket to becoming a millionaire overnight. However, its undervalued status and robust growth prospects make it an attractive part of a diversified investment strategy. By balancing modest investments in high-growth stocks like Roku with the majority of your capital in more stable options, you can build a resilient portfolio poised for long-term success.
On Wall Street, slow and steady usually wins the race. While Roku’s potential for impressive returns is real, it’s essential to temper expectations and build a strategy that fits your financial goals and risk tolerance. Whether you’re aiming for a quick rise or a gradual rise, Roku can play an important role in your investing journey – just make sure your eyes are wide open and your strategy is sound.
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Anders Bylund has positions in Roku. The Motley Fool holds and recommends positions in Roku. The Motley Fool has a disclosure policy.
Could This Undervalued Stock Make You a Millionaire One Day? was originally published by The Motley Fool
