The Nasdaq Composite‘s double-digit rally since the start of 2024 has been a great development for investors. But not all companies have been fortunate enough to see meaningful profits.
Look at the streaming platform operator Roku (NASDAQ: ROKU)Despite benefiting from a new trend in the media landscape, shares are down 41% this year and down 89% from their 2021 peak price.
Is it time to dip into this once beloved growth share?
Improve every quarter
Like many pandemic-era darlings, Roku has faced a post-crisis slowdown. But there’s no reason for shareholders to panic. The latest quarter offered another example of positive results.
Roku reported 14% annual revenue growth in Q2 (ended June 30) to $968.2 million, topping analyst expectations. Ad growth on Roku continues to outpace the overall industry and the streaming niche.
The company continues to be strong in several of its key metrics. Roku now has 83.6 million households as customers and added 2 million net new accounts in the quarter. The streaming platform has the largest market share in the U.S., Canada and Mexico in the smart TV industry.
Engagement is also impressive. Households watched a whopping 30.1 billion hours of content on Roku in Q2. The fact that hours streamed grew faster than active account growth is also worth noting, as it indicates an improvement in engagement per household.
To be clear, Roku has been consistently losing money. The company reported an operating loss of $531 million in 2022 and $792 million in 2023. And through the first six months of this year, that loss was $143 million.
But the company is on the right track. By comparison, Roku reported an operating loss of $338 million in the first six months of 2023. What’s more, the company has generated positive free cash flow on a trailing-12-month basis.
A focus on cost control, coupled with what appears to be a scalable business model, should hopefully lead to rising profits in the years ahead. And this will be a clear sign that Roku is shaping up to be a financially healthy company. For what it’s worth, the company has zero debt, with nearly $2.1 billion in cash and cash equivalents on its balance sheet.
Both Sides of Roku’s Story
Roku could be a good investment choice for those who want exposure to the streaming industry. In addition to the fundamental momentum I mentioned above, the company is well-positioned to benefit from the rise of streaming entertainment. It aims to be a platform agnostic that grows on the billions of dollars that other companies are spending on content.
Additionally, digital ad dollars still have a long way to go when it comes to the migration from linear TV to connected TV. With many leading streaming services acquiring rights to major sports competitions, marketers may find themselves spending more to reach a more engaged streaming audience. And Roku could benefit from this.
Stocks are very cheap today and are trading at a price-sales ratio of only 2.1. That is considerably lower than the historical average of 9.5. The market has completely turned off to this business, a negative perception that may be unjustified.
Of course, it’s not all roses and moonshine. Roku is competing directly with some of the most powerful tech giants, such as Apple, AmazonAnd Alphabetall of whom have virtually unlimited financial resources and skills in the digital advertising space.
Additionally, a valid argument can be made that Roku’s platform needs top streaming apps, such as Netflix, Disneyand YouTube, more than they need Roku. This reduces Roku’s negotiating power.
Nevertheless, this risk may be more than reflected in the stock’s low valuation, and investors may still decide to buy the dip.
Should You Invest $1,000 in Roku Now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have positions in Walt Disney. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Netflix, Roku and Walt Disney. The Motley Fool has a disclosure policy.
Down 89%, Is It Time to Buy the Dip in This Growth Stock? was originally published by The Motley Fool
