The recent decline of Roku (NASDAQ:ROKU) stock has created one of the better buying opportunities among companies that recently launched their IPOs.
Roku, which manufactures devices for streaming and operates its own content platform, became public back in late September 2017 and had a strong debut, with Roku stock price surging 68% on its first day of trading. Since then, Roku stock has gone on to tack on even bigger gains. The market cap of Roku stock is currently about $6.5 billion.
Cord Cutting Unlikely to Slow
Despite the market’s recent volatility, there is little evidence that the megatrend of cord cutting will slow down any time soon; that is certainly very encouraging news for Roku stock price. According to research from eMarketer, the number of Americans who give up cable is expected to surge 33% to 33 million this year. Meanwhile, the number of subscriptions to Over-the-Top services is forecast to jump by 51.7% to 170.1 million.
Here’s how ROKU’s IPO prospectus puts it:
We believe all TV content will be available through streaming. The rapid adoption of TV streaming has disrupted the traditional linear TV distribution model, creating new options for consumers and new economic opportunities for content publishers and advertisers.
Let’s face it: streaming is much more affordable than cable, allows for more choices and control, and has a tremendous amount of quality content.
Roku Has Leveraged the Trend
When it comes to leveraging this trend, ROKU has been very effective. In the second quarter, the company’s revenue shot up by 57% to $156.8 million and the number of hours streamed on its devices surged 57% to 5.5 billion.
In a way, Roku stock is one of the rare hardware players that has been able to survive despite taking on the largest tech players. Fitbit (NYSE:FIT) and GoPro (NASDAQ:GPRO) show how brutal the hardware business can be.
But ROKU has effectively leveraged its hardware business to create a vibrant digital content platform. In Q2, the number of the company’s active accounts rose by 46% to 22 million. Roku has also been able to rapidly shift its revenue mix, as in Q2 its digital content revenue reached $90.3 million, compared to $66.5 million of revenue generated by its hardware segment.
Roku Stock Deserves a Premium, Could Become Takeover Target
Even with the recent decline of Roku stock price, the shares are still not cheap, as they have a trailing price-sales multiple of 10.75. But then again, Roku stock deserves a premium, given the company’s growth rate and its dominance of its industry. According to Parks Associates, ROKU has about 37% of the streaming media player market, versus Amazon.com’s (NASDAQ:AMZN) 28% and Apple’s (NASDAQ:AAPL) 15%. Keep in mind that the market is expected to double by 2022.
Besides, ROKU could ultimately become a takeover target at some point, as large tech companies would definitely like to get a piece of the streaming media player opportunity. That is actually the thesis of Needham & Co. analyst Laura Martin, who identifies a number of potential suitors, including Facebook (NASDAQ:FB), Verizon (NYSE:VZ), AT&T (NYSE:T), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon.com.
And she also believes that Roku stock is attractive at current levels, as she recently boosted her price target on ROKU from $60 to $85, implying about a 40%+ upside from current levels.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.