1 Growth Stock Down 85% to Buy Right Now

Investors are probably still trying to make sense of it Roku (NASDAQ: ROKU) stock. The pandemic darling crashed during the 2022 bear market and never recovered, leaving it trading about 85% below its July 2021 all-time high.

However, despite the stock struggles, the user base and hours spent on the platform have not stopped growing. This and other factors could serve as the catalyst that will eventually bring about a recovery in the entertainment stock.

Roku state

Indeed, some user numbers may leave investors wondering why the stock never recovered. In the second quarter of 2024, nearly 84 million streaming households were actively using a Roku device, a 14% year-over-year increase. In addition, the 30 billion hours of streaming meant a 20% increase in usage, indicating that users spent more time on the Roku platform.

In addition, Roku remains the most popular TV operating system in the US, Canada and Mexico. Roku’s unit sales are also higher than the company’s next two peers combined. Such signs should be bullish for the stock.

The frustration among Roku shareholders likely lies in the average revenue per user (ARPU) numbers. Despite higher usage by more people, ARPU over the past 12 months stood at $40.68, virtually unchanged from year-ago levels.

Roku explained this by explaining its moves in international markets. In many of these places, monetization is in the early stages, meaning that the subscribers added are not yet generating significant revenue for Roku.

Roku tries to counter this with advertising. The company said ad revenue growth outpaced the overall ad market, excluding media and entertainment. Roku also introduced its partnership with Trade officewhich allows advertisers to better interpret and optimize ad campaigns based on Roku data.

However, such improvements don’t seem to have worked fast enough for Roku’s investors. With the stock only up 10% over the past year, investors may rightly wonder when this anticipated recovery will finally happen.

Roku’s financial results

Still, Roku’s overall financials have improved despite its struggles. Revenue in the first half of 2024 was $1.85 billion, up 16% from the same period in 2023. The fastest growth came from device revenue at 29%, but platform revenue, which the largest part of the company’s revenues, increased further by 15. %.

Moreover, Roku was able to reduce its operating expenses by 9%. This significantly reduced losses, which fell to $85 million in the first two quarters of 2024, a massive improvement from losses of $301 million in the same period last year.

The story continues

Free cash flow was also nearly $69 million, showing that the drag on profitability was $183 million in stock-based compensation expense.

Such challenges have made Roku a cheap stock. While its losses mean the stock doesn’t have a P/E ratio, the price-to-sales (P/S) ratio remains below 3. That’s well below the sales multiple at the peak of the 2021 bull market, when Roku briefly sold above 30 times. sales.

While shareholders shouldn’t expect a return to that valuation, it does show how much Roku could grow if it regains investor confidence.

Consider Roku stock

Finally, despite the massive decline in Roku stock and years of stagnation, a sustained stock recovery may finally be coming soon.

Roku continues to attract more users who spend more time on its platform. It also continues to build relationships that should increase revenue as Roku better monetizes its ad platform both in the US and internationally. Of course, the lack of ARPU growth and ongoing losses remain a frustration. However, as the company develops monetization efforts in international markets, its ARPU should increase over time.

Additionally, Roku’s growing popularity has boosted revenue. With continued improvements, the company could turn profitable soon, giving investors even more reason to start believing in Roku stock again.

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Will Healy has positions in Roku and The Trade Desk. The Motley Fool has positions in and recommends Roku and The Trade Desk. The Motley Fool has a disclosure policy.

1 Growth Stock Down 85% to Buy Right Now was originally published by The Motley Fool