Is Purchasing Roku Shares Today a Step Toward Lifetime Wealth?
I'm a major fan of Roku's (ROKU -3.08%) media-streaming service platform and I've been an investor for a while. This company is on the cusp of massive long-term growth, making it a tremendous global business opportunity. Whenever someone asks me for a stock suggestion, Roku often comes to mind before any other idea, as I believe the stock isn't getting the attention it deserves in the market.
In my opinion, Roku is an excellent investment choice. However, purchasing a large quantity of Roku stock today might not guarantee financial security for the rest of your life.
Roku's potential market dominance
Let's delve into the bullish viewpoint for buying Roku stock. This is the easy part.
If you reside in North America and use video-streaming services on your TV, you've probably come across Roku. According to Comscore, Roku dominates the North American video-streaming market by serving up an impressive 49% of the video-streaming hours on connected TVs. Amazon (AMZN -1.45%) trails behind with a 16% timeshare, while Samsung (SSNL.F -28.76%) comes in third at 14%. There isn't a brand out there with double-digit percentages.
Roku serves 85.5 million active households, with many households having multiple Roku devices. The user base is growing at an annual rate of 13%, driving revenue growth by 15% and boosting gross profits by 30% over the same period. This is a robust growth story.
Moreover, Roku is a profitable company in areas that matter most. The company reported a net loss of $9 million in the third quarter but also generated $67.6 million in free cash flow during the same period. While earnings might be in the red, Roku remains a reliable source of cash.
I won't bore you with details about the Roku Channel, e-commerce features within the Roku City screensaver, ad-buying integration with The Trade Desk (TTD -1.68%), or Roku's international expansion plans. Suffice it to say that the company is well-positioned for growth with numerous current and potential catalysts, and I expect impressive business growth for Roku over the next decade.
Roku's potential challenges
On the flip side, many investors choose to focus on Roku's problems instead of its growth potential. Average revenue per user (ARPU) has remained roughly flat in recent years, while ad sales have suffered in the face of a market slump in the digital advertising sector. I mentioned Roku's negative bottom-line figures earlier.
However, these problems are not rooted in any fundamental flaws in Roku's business model. International user growth can only be achieved at a slower pace, the ad market will recover now that the inflation crisis has passed, and Roku would gladly report pre-tax accounting losses if it meant higher cash profits.
But, bearish arguments are still effective. Consequently, Roku's stock has dropped 21% in the past year and 60% over the past three years as of Dec. 5. The stock is currently trading at an inexpensive price-to-sales (P/S) ratio of 3.1, which is comparable to slow-growing value stocks. Even utility stocks often have more expensive P/S ratios than Roku, despite posting lower revenues and limited growth potential.
Roku's stock is significantly undervalued and deserves a higher price. I strongly encourage adding Roku to your investment portfolio now and holding on for the long term.
Why I wouldn't bet everything on Roku
Nevertheless, I'm not going to sink all my savings into Roku stock. This stock represents just 4% of my retirement portfolio, and I'm comfortable with that.
This isn't merely a call for diversification. It's also a recognition that Roku consistently proves its worth to a skeptical market, yet the stock price continues to decline. I have purchased Roku shares in the past and I'm willing to wait for a market shift before making any additional investments.
Moreover, Roku's stock recorded an unusual price increase following suggestions from analyst firm Needham that the company could be a target for a takeover. I'm uncertain if Roku CEO and Chairman Anthony Wood would consider accepting an acquisition offer at this time, but takeovers have caught me off guard before.
If acquisition happens, Roku shareholders would only reap the benefits of the acquisition price. A stock-based deal would introduce a different stock into your portfolio, making it equivalent to buying the future parent company instead. While this outcome would be profitable in the short term, it's not the path to building lasting wealth.
Roku stock could be an essential part of your investment strategy
In conclusion, I would jump on this stock if I didn't already hold a satisfactory Roku position. However, I have my limits when it comes to investing in an obstinate stock like Roku. I prefer to keep my exposure to a single stock relatively modest rather than investing heavily. If you really want Roku stock to secure your financial future, you can certainly go all-in - but be prepared for market makers to overlook this underrated growth stock.
Based on the text, here are two sentences that contain the words 'finance', 'investing', and 'money':
Given Roku's robust growth and undervalued price, it could be a great investing opportunity for those with an interest in finance. With its impressive revenue and profit growth, Roku stock might be an ideal addition to a diversified investment portfolio, offering potential returns in the long term.
