Wednesday's Vital Data: JPM, NFLX, TWTR >>> READ MORE

2 Reasons to Shrug Off Negativity on Roku Inc Stock

ROKU is slipping as investors take profits, but now might be a great time to buy

By Laura Hoy, InvestorPlace Contributor
Roku Inc Stock (ROKU) Has Upside -- But It Requires Patience

Source: Shutterstock

Roku Inc (NASDAQ:ROKU) has delivered stellar growth to investors since going public at the end of September. ROKU stock is up 135.91% since it hit the market, and 2018 might see the share price continue to climb.

Bears say the streaming platform’s valuation went beyond reasonable levels during its most recent rally. Roku’s boxes may still go the way of Garmin LTD’s  (NASDAQ:GRMN) navigation devices as TVs get smarter and become more capable of accessing streamed programming.

I, however, believe now might be a good time to take a position in ROKU stock. On Thursday morning, Morgan Stanley lowered its rating to underweight from equal-weight, saying that the firm’s valuation has gotten too high. The stock is down 7.5% in afternoon trading.

While this could be a concern, I think that ROKU has a lot of positive catalysts on the horizon. Ultimately, investors will see a repeat performance of last year’s impressive gains.

Smart Home Connection

While I agree with fellow InvestorPlace contributor Will Healy that ROKU’s TV boxes could eventually be rendered obsolete as TVs get smarter, the firm appears prepared. This week Roku announced the creation of its own smart assistant, thereby expanding its platform and becoming a part of people’s connected homes.

Roku’s voice assistant will operate its boxes and play content in response to voice commands. The company is also putting out reference designs for device makers, so that they can make soundbars and speakers that connect to Roku devices directly.

Perhaps the most exciting, however, is the Roku Connect software. This will allow other manufacturers to build products that connect to Roku devices.

Roku is carving out a place in the Internet of Things and working to embed itself in its users’ homes. Once Roku integrates with several other devices in a user’s home, switching costs will be higher, giving people a reason to stick with Roku.

The Effect Of The Fox-Disney Deal On Roku Stock

Another positive catalyst for ROKU stock is the tie-up between Twenty-First Century Fox Inc (NASDAQ:FOX) and Walt Disney Co (NYSE:DIS). ROKU won’t directly benefit financially from the merge. It should, however, give ROKU investors a reason to cheer during the upcoming year.

As a result of the Disney deal, FOX spun off some of its assets, creating a separate publicly-traded company. In the process, the network decided to hold on to its large stake in ROKU — which shows that the firm has a lot of confidence in Roku’s long-term future.

The real boon for ROKU, though, is the fact that Disney is about to become a streaming powerhouse.  Disney has an impressive portfolio of hit movies and TV shows. Adding these to its streaming offerings could draw new Roku customers. And Disney now has the benefit of Hulu’s technical expertise to speed up the process.  Disney is launching an ESPN sports-streaming service in 2018 and will follow with a Disney-branded entertainment service in 2019.

Disney’s grand entrance into the streaming space will accelerate the exodus of advertising dollars from traditional TV and direct them to streaming. Roku makes the majority of its money from advertisements. As advertising on streamed content gains momentum, Roku only stands to gain.

Roku will also see a new revenue stream open up, as the firm will likely get a cut of the sign-up fees if customers join Disney’s streaming service through their Roku device.

The Bottom Line on Roku Stock

The streaming space is gaining momentum quickly. If you haven’t already made a bet on it, now is the time  to start considering some streaming plays.

ROKU stock has proven to be a formidable contender in the streaming space. The newer, smaller company has held its own against giants like, Inc. (NASDAQ:AMZN) and Apple Inc. (NASDAQ:AAPL). Although there is some risk in the future, I think ROKU is evolving alongside its competitors rather than being left in the dust.

With current investors taking profits at the moment, now might be a good time to add Roku to your portfolio.

As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities. 

Article printed from InvestorPlace Media,

©2019 InvestorPlace Media, LLC