3 Reasons to Buy Roku Stock Like There’s No Tomorrow

Roku (ROKU -3.49%) The stock is still down 86% from its highs, but got a small boost last week when an analyst upgraded it. Are things finally starting to look good? It is already recovering from its all-time lows, and now is the time to catch it up. Here are three reasons not to miss this opportunity.

1. The compelling advertising business

People know Roku for its hardware, or the streaming devices you can buy to connect a screen to a streaming account. It holds the top spot for devices in the US, Canada and Mexico and is making a bigger splash internationally.

But the vast majority of Roku’s revenue — 85 percent in the second quarter — comes from its advertising business. The advertising business is also the most profitable business, accounting for all of the company’s gross profit. The hardware segment, as strong as it is, aims to bring more accounts into the Roku ecosystem so the company can capture more share of the streaming ad market.

He does a splendid job. Device sales rose 39% year over year in the second quarter, contributing to a 14% year-over-year rise in household accounts to a total of 83.6 million. More accounts create more streaming opportunities and hours, and watch hours grew 20% year-over-year in the quarter.

Advertisers love these increases and are more likely to spend more of their budgets wherever more people are watching, which is why these numbers are so important to Roku. Basically, more hours means more ads to run and more money coming from ad sales. Management announced a new initiative to place ads on the home screen, where all viewers begin their streaming journeys, whether they’re watching a free, ad-supported or premium network.

The advertising business felt inflationary pressure when partners cut their advertising budgets. But the advertising business is coming back. The market liked the company’s recent announcement that it had entered into a new agreement with Trade office for advertising partners to use robust data analysis to optimize their advertising campaigns. An analyst update after the report sparked the recent rally in Roku’s stock price.

2. Spectators continue to cut the cords

The momentum is building. Viewers continue to cut the cord or switch from traditional viewing platforms to streaming, and Roku has an advantage with top-selling devices and free channels. A certain percentage of cord cutters won’t pay for a premium subscription, but will easily switch to the ad-free Roku network, which offers a plethora of on-demand streaming options.

Do you want proof? In the first quarter, broadcast hours were up 23 percent year-over-year, while broadcast hours were down 13 percent, according to Nielsen. Roku is uniquely positioned to benefit from this shift.

It’s also poised to gain from cable TV subscribers switching to streaming. According to Statista, US pay TV subscribers fell from 84 million in 2019 to 53 million in 2023. And in the most recent data from last year, 27% of pay TV subscribers in the US and Canada planned to cancel and go to streaming. the next six months. These cord cutters need devices, and many are buying Roku dongles and smart TVs and creating accounts.

Management said that while television viewing of the June 27 US presidential debate was down 30% from the first presidential debate the year before the presidential election, more than 40% of Roku channel viewers tuned in to the debate in directly on Roku channels and the ad-free TV channel had record engagement.

The trend will continue to move in Roku’s favor, if not accelerate.

3. It’s still super cheap

Roku stock has been cheap for a while. It’s down 26% this year alone for a combination of reasons that include slowing growth, a squeezed ad business and potential competition. But as Roku keeps pace with robust sales growth and improving profitability despite the pressure, it’s looking more and more like a bargain.

Roku stock trades at a price-to-sales ratio of 2.5 and still looks like a bargain at that price. If interest rates fall this month, as expected, Roku’s business — and stock price — will benefit.