Investing entails weighing risk and reward, growth and stability, promise and performance—inviting investors to partake in this balancing act. In this landscape, growth stocks, with their potential to outperform the market, beckon to those with $1,000 to deploy. Enter Roku (NASDAQ: ROKU), a growth stock that, in the current scenario, stands out as an underappreciated gem that warrants serious attention.
Roku’s Attributes as a Growth Stock
Roku has acquired a lucrative, enduring niche in the rapidly expanding media streaming industry, which has become the linchpin of modern media consumption.
Since its inception as Netflix’s hardware division, responsible for fabricating the first video streaming set-top boxes, Roku has evolved into a market-defining, dominant leader. In the third quarter of 2023, devices running Roku’s streaming platform software accounted for a staggering 51% of the global connected TV (CTV) market, according to analysts at Pixalate.
Following a period of stagnant growth, Roku is now demonstrating a resurgence in its financial performance. With fourth-quarter sales climbing 14% year over year to $984 million and boasting $176 million in free cash flow, Roku’s fiscal well-being appears robust.
Moreover, Roku has continued to attract new users, even during challenging times, adding 10 million net new active user accounts over the past year, totaling 80 million. The platform’s streaming hours have also surged by 21% within the same timeframe, signifying not only growth but also heightened user engagement.
Looking ahead, Roku has outlined a promising trajectory, aiming to perpetuate its revenue growth and enhance free cash flows. The forecast indicates a forthcoming emphasis on long-term profitability, which could provide reassurance to investors. Recent initiatives in this direction include an aggressive cost-cutting program and modest price adjustments following the tumultuous inflation period.
Despite acknowledging the challenges posed by an uncertain macro environment and a rebounding ad market, Roku still anticipates a 20% year-over-year increase in sales to approximately $850 million in 2024.
The Long-Term Game
Notwithstanding these robust financial metrics, Roku’s stock endured a 24% decline on Friday, following the release of the earnings report on Thursday evening. This counterintuitive price drop reflects market volatility and investor sentiment but also presents a potential under-the-radar investment opportunity.
The sole compelling reason to divest Roku shares at present would be to capitalize on recent price gains—the stock concluded Thursday’s trading session with a 132% increase from the end of 2022. However, doing so might entail missing out on future prospects, a decision that could potentially be regrettable.
For the long-term investor, Roku’s strategy harmonizes with industry trends. The shift toward digital media consumption is a wave that Roku is markedly positioned to ride. CEO Anthony Wood consistently reminds investors that all media viewing and advertising will eventually transition to digital platforms, and Roku stands well-prepared to capitalize on this fundamental paradigm shift.
The recent plummet in Roku’s stock price parallels the substantial decline in Netflix shares in 2011, when the company revamped its streaming service, shedding the legacy DVD-mailer business—an event remembered as the Qwikster debacle, a move that transpired nearly 6,000% of market-thrashing stock returns ago.
However, unlike Netflix’s share decline, which ensued a precarious strategic shift, Roku’s stock drop occurred following a rock-solid earnings report accompanied by a healthy guidance. There is no radical new strategy on the table.
From my perspective, Roku’s stock bore a 24% depreciation without justifiable cause. Such junctures offer investors with $1,000 an opportunity to acquire shares in a robust company at a bargain. For anyone considering an investment in a growth stock at present, Roku presents a compelling case.
Consider Roku: A Worthy Investment
Backed by solid fundamentals, a clear growth trajectory, and a market standing that suggests resilience and adaptability, Roku emerges as a growth stock poised to yield substantial returns over time. While the road ahead may be fraught with challenges, nothing undermines Roku’s business. Conducting due diligence, as with any investment, is paramount. However, Roku’s recent performance and future prospects render it a worthy candidate for an investment portfolio.
Personally, I am contemplating doubling down on my Roku investment as soon as I cease scribbling about it for a spell.
Considering a $1,000 Investment in Roku?
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Anders Bylund holds positions in Netflix and Roku. The Motley Fool has positions in and recommends Netflix and Roku. The Motley Fool has a disclosure policy.
