Down 91% Since 2021, Roku Stock Is Now a Buy

Once a pandemic darling, television streaming platform Roku (ROKU -2.71%) is showing signs of investable value after a multi-year stock boom and bust. Like many other companies that benefited from the stay-at-home policies of the COVID-19 response, Roku stock rose parabolically beginning in mid-2020. Roku's rise coincided with high profile investor Cathie Wood's Ark Invest vehicles making multiple purchases of its shares. Of course, one year's bull market often turns into the next year's bear market, and shares eventually cratered. From its highs in July 2021, shares have fallen by over 91%.

Of course, such drastic price swings, first up, then back down, indicated market overreaction rather than a fundamental change in Roku's business performance or status. Now that the stock has fallen out of favor, it's time to take a closer look at the company's fundamentals to see if it is now a compelling opportunity.

Roku's first quarter of 2024 showed continued strength

While many of the violent swings in Roku's stock price could be blamed on market overreaction, there is no denying the fact that the company has historically been unprofitable. It has turned a full-year profit in only one year since 2015. This fact helps explain why the market ultimately lost faith in Roku and sold off the shares. However, in recent years Roku has generated hopeful results, particularly in the last few quarters.

Roku's first quarter in the 2024 fiscal year is a case in point. The company reported a slew of impressive results, including:

• Revenue increase of 19% year over year to $882 million
• Platform revenue (non-hardware) of $775 million, up 19% year over year
• Three consecutive quarters of positive adjusted EBITDA and free cash flow

These results were driven by an increase in both customer counts -- streaming households, as Roku calls them -- and streaming hours. Growth in these areas is confirmed by Roku's status as the No. 1 smart TV operating system in the United States.

Roku is poised to benefit from digital entertainment trends

Roku is picking up steam during a critical moment in digital entertainment. The company, which is best known for its streaming sticks and branded smart TVs, is becoming a bigger player in the content that so often streams on its (and other) smart TVs. The Roku Channel, a free, commercial-supported content channel, is the No. 3 app on the Roku ecosystem, and streaming hours were up 66% year over year for the channel. Roku's branded channel and its TV "home screen" presence on so many devices have made it a potent digital advertiser, which is the most compelling aspect to its business.

The streaming wars are still largely undecided at this point, with two trends seemingly in place: Expected consolidation and the embracing of ad-supported tiers. Roku is uniquely positioned to succeed in this environment. It is making money on ad-supported content, and its hardware and operating systems will be used regardless of how the streaming wars play out.

Roku also offers AI exposure, having released AI-optimized TVs as part of its Pro Series of smart televisions. The AI features analyze metadata and automatically adjust picture quality in real time, scene by scene.

The fundamental case for buying Roku stock now

While Roku seems well-positioned in the current digital entertainment marketplace, any investment ultimately comes down to a value proposition: Are shares currently worth purchasing for the long term? This is especially relevant since the initial COVID boom was so devoid of fundamental merit, being driven instead by hype and speculation.

Things have changed, though. The company has been generating adjusted free cash flow. While it still has not turned a profit in recent years, hope is on the horizon. With the massive reduction in stock price, Roku is offering compelling value.

For one thing, the company has almost no debt. It actually has positive net current asset value, which is calculated by subtracting all of its liabilities from its current assets, of $7.90 per share. At recent share prices, Roku is trading at 7.9 times its net current asset value per share, which is evidence of value.

Data source: YCharts.

Roku displays solid book value, and while not exactly cheap on a price-to-book value or price-to-sales ratio, it is certainly attractive at these levels. While it is unusual to call a company with negative net earnings a value pick, Roku does indeed show value at current prices. Patient investors who want shares in a company with no debt burden, profit potential from streaming television regardless of which channels lead the way, and balance sheet strength should considering adding shares of Roku.