Let me tell you a little secret about stocks. High-flying, big-growth tech stocks tend to have big corrections after big rallies. But as long as the companies’ fundamentals remain strong, those corrections ultimately turn out to be excellent buying opportunities. Amazon (NASDAQ:AMZN), which has had countless 10%-plus corrections, is a good example of that rule. So when you see a high-flyer like Roku (NASDAQ:ROKU) stock drop into bear market territory yet still be up 150% over the past year, don’t sound the alarms. Instead, stay calm. Look at the fundamentals. See if the drop of Roku stock price is warranted by a weakening of its growth prospects. If it is, stay away. You have a falling knife. If it isn’t, wait for the storm to calm, then buy the dip.
I think ROKU is poised to become similar to Amazon stock. Roku’s fundamentals are strong and getting stronger. But the market is freaking out over broader tech valuations. At the end of the day, the valuations of tech stocks aren’t overextended as long as they can maintain their growth trajectories.
Given secular tailwinds in streaming adoption and over-the-top advertising, ROKU can maintain its current growth trajectory. As a result, Roku stock deserves its premium valuation, and this correction will ultimately prove to be a long-term buying opportunity.
The Fundamentals of Streaming And OTT Advertising Are Improving
At its core, Roku is a company which sells OTT streaming devices that act somewhat like the “cable box” of streaming, while also operating its own free OTT streaming service that is supported by digital video ads. So Roku stock is a pure-play on secular tailwinds in the streaming and OTT advertising markets.
The fundamentals of those markets remain healthy and look poised to only get better. Netflix
(NASDAQ:NFLX) just reported robust third-quarter numbers, and while the market’s near-term euphoria towards Netflix stock didn’t last, the numbers underscored that the global streaming trend is gaining traction. Indeed, at this point in time, it does look like the whole world will eventually migrate from linear to internet-based entertainment, and as it does, the number of streaming subscribers and streaming services globally will grow by leaps and bounds.
That is good news for ROKU. As the number of streaming subscribers and streaming services grows, demand for Roku’s centralized OTT ecosystem will grow, too. The more streaming services there are, the greater the need for a place for consumers to aggregate all of those streaming services. And as more consumers stream, there will be more Roku devices and Roku TVs in the world (it’s important to note that Roku has a nearly 25% share of all the smart TVs sold in the US).
Meanwhile, as goes the streaming market, so goes the OTT advertising market. A consistent pattern in recent history is that ad dollars follow engagement. When engagement went from print to TV, ad dollars followed suit. Likewise, when engagement went from non-digital channels to digital channels, ad dollars made the same trip. Thus, as engagement goes from linear TV to internet TV, ad dollars will inevitably follow suit.
As the global leader in the streaming-device market, Roku’s Roku Channel service is well-positioned to win the lion’s share of those ad dollars.
Overall, the fundamentals supporting ROKU remain exceptionally favorable. The valuation of Roku stock is high, but the premium valuation is warranted if you consider the hyper-growth potential of this company.
Roku Stock Is Undervalued, But Patience Is Key
My long-term analysis on Roku suggests that the company could be worth $60 billion within the next decade (see the math here). Thus, Roku stock’s current market cap of under $6 billion seems like a steal.
But just because Roku stock price is too low doesn’t mean Roku stock will rebound right away. Fundamentals drive long-term share price performance. But in the near-term, sentiment and optics are big drivers, too.
Right now, sentiment and optics are weak. Roku’s streaming peer, Netflix, reported great numbers, popped, and then gave up all those gains in a day. That is a horrible sign. Tech stocks are getting slammed by the threat of higher interest rates. And concerns regarding the sustainability of growth are starting to plague the entire market.
In other words, buying Roku stock now is a dangerous and risky game in the near-term due to poor sentiment and optics. Eventually, strong fundamentals will trump poor sentiment and optics. But it’s anyone’s guess as to when that will happen. Thus, it is best not to fight the market on this one. Let the market sell off Roku stock. Let Roku stock price come down. But know that the lower it goes, the better it looks as a long-term buying opportunity, and be prepared to buy ROKU once the tech market stabilizes.
Bottom Line on Roku Stock
High flyers have big corrections all the time. There isn’t any need to sound alarms. ROKU’s fundamentals remain strong, and its long-term value proposition remains compelling. Thus, investors should simply wait for the current storm to pass and then buy the dip once things have settled and markets have stabilized.
As of this writing, Luke Lango was long AMZN and ROKU.
