Roku (NASDAQ: ROKU) recently reported financial results for the first three months of 2024. Based on the stock’s immediate drop, the market wasn’t pleased. That’s kind of a head-scratcher.
The business raked in revenue of $881 million and registered an adjusted loss per share of $0.35. Both of these headline figures beat Wall Street consensus analyst expectations.
Nonetheless, the results didn’t prevent the shares from continuing their fall. As of this writing, this streaming stock is 88% off its all-time high, which was set in July 2021. But I think this makes Roku look like a screaming buying opportunity right now.
Here are three reasons why.
1. A royalty on the growth of others
Legendary investor Warren Buffett once said something along the lines of a quality business being one that is a royalty on the growth of others. I believe Roku might fit this description.
Over the past few years, we’ve seen the so-called streaming wars heat up. Major players, like Netflix, Walt Disney, Amazon, Apple, and Warner Bros Discovery, all spend billions of dollars to create and license compelling content, all to drive subscriber growth.
Roku largely avoids this battle. It aims to be an agnostic platform that allows customers to have access to all their favorite shows and movies, whether via streaming, cable, or broadcast, in a single user interface.
The business benefits when those content companies invest so heavily. From the viewer’s perspective, this continuously makes streaming a better offering than other video entertainment options. And because there are so many streaming services on the market, Roku’s value proposition speaks for itself.
2. Positive feedback loops
Investors should try to identify businesses that benefit from positive feedback loops, wherein success in one area automatically helps another part of the company in a virtuous cycle. This describes Roku.
At a high level, this business is a three-sided ecosystem. As of March 31, Roku had 81.6 million active accounts that streamed 30.8 billion hours of content during the quarter. As these households spend more time watching TV, that engagement immediately becomes valuable for advertisers looking to target a connected-TV audience. This results in more revenue potential for the company.
As activity on Roku picks up, both from customers and marketers, those previously mentioned content services have no choice but to be available on the platform. This further draws in viewers who value the breadth of content. From Roku’s perspective, this leads to the ability for greater monetization.
3. An attractive setup
The third, and perhaps most obvious, reason that investors should buy Roku shares on the dip is because of the valuation. The stock trades at a price-to-sales (P/S) ratio of 2.3. That’s significantly below its historical average of 9.8.
The beaten-down valuation indicates just how much the market continues to sour on this business. This is the ideal situation for bullish investors, particularly those who believe that Roku will do well in the long term. When expectations are low, it just means the upside is greater.
Based on what I discussed above, Roku is well-positioned to benefit from the ongoing growth of the streaming industry. More specifically, as more households decide to cut the cord and ditch their traditional cable bundles, Roku could continue to see its base of active accounts expand. There is still a sizable runway for the company to grow over the next decade and beyond.
That’s enough of a reason for prospective investors to want to take advantage of this opportunity to add the stock to their portfolios.
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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 no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Netflix, Roku, Walt Disney, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
Here Are 3 Reasons Why You’ll Regret Not Buying Roku Stock on the Dip Right Now was originally published by The Motley Fool