Some investors think Roku (ROKU 1.45%) stock is expensive, and it's easy to see why. The media-streaming technologist's shares trade at lofty valuation ratios like 95 times free cash flows and 120 times forward earnings estimates. It's enough to drive a nervous value investor distracted -- but I don't think Roku stock is expensive at all.
NASDAQ: ROKU
Key Data Points
Sure, the company is unprofitable at the moment and the current stock price seems expensive in the context of next year's expected return to modestly positive earnings. But the tiny or negative profits are a direct result of Roku's focus on revenue growth. In particular, the hardware division is running at deeply negative profit margins as the company uses low-cost streaming gear as a marketing device.
Therefore, it makes more sense to look at Roku's stock in light of its sales-based valuation. In that perspective, Roku's stock is on a fire sale:
ROKU Revenue (TTM) data by YCharts
The hidden value behind Roku's streaming strategy
In this chart, you're looking at Roku's explosive sales growth and plunging price-to-sales (P/S) ratio over the last four years. Recent P/S values are some of the lowest ever seen for this stock.
Roku is a high-octane growth stock with soaring user counts and skyrocketing top-line sales. It took a pause during the inflation crisis of 2022, but so did essentially the rest of the world. Now it's back to soaring sales growth, and there should be plenty more of that in the next few years. After all, Roku's international expansion is in its early stages, and the chart above still reflects jittery consumers and an unstable global economy.
Most stocks in this P/S range are low-growth businesses like regional banks and industrial manufacturers. In my mind, Roku's stock deserves a much richer P/S ratio.
