Media-streaming technology expert Roku (ROKU -4.59%) saw its stock price soar to incredible heights during the coronavirus lockdowns. The golden era ended in the summer of 2021, and Roku's stock took a beating.
These days, it's skimming near 52-week lows, more than 88% below the peak prices from three summers ago. Meanwhile the stock market as a whole is setting records on an almost daily basis, never inviting Roku to the party.
Is Roku a great buy right now, poised to roar back from this deep dip? Or has the stock market identified a failing business on the verge of collapse, a falling knife that's best left alone in Wall Street's bargain bin?
Spoiler alert: Roku is one of my favorite stocks to buy right now. Let me tell you why.
Roku's revamped revenue streams
I've got some helpful numbers to show you, but let's start with a brief business overview. Roku makes money through three main channels: hardware sales, platform revenue, and content distribution.
First, Roku sells streaming devices, like Roku players and Roku TVs. These devices enable users to stream content from various services such as Netflix and Hulu. This used to be Roku's core business, but times have changed. Hardware sales accounted for just 14% of the company's total sales last year.
Then, Roku earns some money by distributing streaming services. It partners with content providers and streaming-service platforms, receiving payments to promote or feature certain apps or services on Roku's platform. This revenue stream isn't even reported separately in Roku's financial statements. Instead, it's baked in with the third and most important source of sales.
That division is known as platform revenue. This includes advertising, subscription fees, and transaction fees. Roku shows ads on its free channels and during video streaming.
Advertisers pay Roku to reach their audience through these ads. More ads are sprinkled across the content-selecting user interface, including the popular Roku City screensaver. Furthermore, when users subscribe to streaming services or purchase movies via Roku, the company gets a share of the revenue from these transactions.
No matter how you slice it, ad sales are a major driver of Roku's financial success. When the digital ads market is experiencing a downturn, Roku takes a hit from lower ad-buying interest. That's why sales growth stalled during the inflation crisis in the middle of a price correction from the overly enthusiastic stock prices of 2021.
Roku's financial health and future prospects
The thing is, Roku never slowed down where it matters the most.
The company consistently added millions of streaming households (formerly known as active accounts) in every quarter, even in the days of paused revenue growth. The year-over-year growth rate on this crucial metric never fell below 14%.
Roku is largely waiting for a full recovery in the ad-selling space. Judging by the stellar results reported by ad-service titans like Alphabet and The Trade Desk in recent months, the upswing is already underway.
And Roku isn't resting on its laurels. The company is quietly expanding its revenue base while waiting to pounce on that ad-sales recovery.
For example, it partnered with The Trade Desk in a cross-selling ad sales project last month. The Roku Pay service is handling more and more service-subscription payments directly in the streaming experience. And the award-winning original content in the free, ad-supported Roku Channel is now an important component of the company's revenue-boosting plans.
Is it too late to buy Roku stock? Absolutely not!
Roku's journey from a hardware-focused company to a platform-centric powerhouse is impressive. Despite recent market challenges, the company's strategic shifts and partnerships position it well for future growth. And I can't think of a company that stands to benefit more from a healthier advertising market.
With modest valuation ratios such as 2.2x price-to-sales and 19x free cash flow, combined with rising cash flow, Roku looks like a steal at these low prices. I'm not alone in this assessment, either. Renowned growth investor Cathie Wood's ARK Invest funds boosted the number of Roku shares in their portfolios by 42% in the last four months.
If you've been wondering, "Is it too late to buy Roku stock?" my answer is a resounding no.
