Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2020 contest. Left Brain Investment Research’s pick for the contest is Roku (NASDAQ:ROKU).
A lot has changed in the last few months, and a lot remains the same. Lives have been impacted dramatically by the novel coronavirus and the stock market is a lot lower than it was. The financial difficulties of social distancing and sheltering in place will impact different businesses differently.
One business that stands to weather the storm well, and now trades at a dramatically lower price, is Roku (NASDAQ:ROKU).
Roku is essentially an operating system for smart TVs. It makes streaming players that connect to your TV, as well as Roku TVs that have the streaming experience built in. Users simply connect them to the internet, set up a Roku account and start streaming.
Here’s Why Roku Is One of the Best Stocks
Roku is solving the complications of television advertising in a streaming world. Specifically, Roku has developed powerful search features and a powerful advertising platform. And the company stands to benefit from a massive and growing total addressable market on the backs of companies like Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) and Disney (NYSE:DIS). These companies will continue to compete against each other, but not against Roku.
Unbeknownst to many, a third of all smart TVs sold in the U.S. come with the Roku operating system already installed. This may not sound like a big deal considering so many people consume content through smart phones, tablets and PCs. However, smart TVs are far less expensive than those other devices. This makes them a much more cost-effective platform for consumers.
Further, Roku continues to win new deals with TV manufacturers. Keeping the manufacturing costs of smart TVs low is paramount in this cost-competitive space. As we explained in our last article, the price of a smart TV would go up if the manufacturer didn’t use Roku.
What Has Changed for Roku Stock?
In recent months, ROKU stock’s share price and valuation ratios have changed dramatically, and the Covid-19 pandemic is also a vast change to the world in which Roku operates.
Regarding the company’s stock price and price-sales ratio, they have both fallen dramatically.
The selloff has been driven, in large part, by the indiscriminate panic the coronavirus has caused.
However, this article shares data from Nielsen suggesting media consumption could be about to boom, especially as people shelter in place. Further, as viewership shifts from live sports (which have essentially come to a standstill) to streaming, that too can benefit Roku significantly, as advertising dollars shift.
What Remains the Same
Despite the recent market turmoil, several important things remain the same for Roku. First, the company remains the leader in the smart TV operating system space. According to CFO Steve Louden, during Roku’s most recent quarterly call:
“The sustained level of robust revenue growth speaks to the fundamentals of our business, the difficulty of replicating our strategic advantages and market leading position and our laser focus and leadership in streaming.”
And in that regard, Roku’s strong revenue growth and massive opportunity also remain the same. For example, even before the turmoil began, Roku announced that its most recent quarterly revenue grew 49% and exceeded expectations.
This extends the company’s consistent track record of exceptional growth. Further, as CEO Anthony Wood said during the call, “Most TV is still delivered the old-fashioned way, streaming still has a long way to go and the streaming decade lies before us.”
In particular, the global video streaming market is expected to reach $184.3 billion by 2027, according to a new report by Grand View Research. That’s a compound annual growth rate of 20.4% from 2020 to 2027. Grand View writes:
“Rising technological advancements such as implementation of block-chain technology in video streaming and use of artificial intelligence (AI) to improve content quality are expected to boost market demand over the forecast period. Furthermore, growing adoption of cloud-based streaming solutions to increase the reach is directly influencing market growth. This trend is observed in numerous parts of North America and Asia Pacific. Factors behind the growth of these regional markets include rapid digitalization, increasing use of mobiles and tablets, and growing popularity of online viewing.”
This bodes well for Roku’s continuing growth.
There Are Risks:
Of course, there are risks to Roku’s business. For one, it is a very volatile stock, and small change in future growth expectations can move the price dramatically.
Further, Roku burns a lot of cash to fund growth. Should the capital markets lose faith in Roku’s ability to grow, funding could decrease, thereby putting financial pressure on the company and its valuation.
Additionally, considering the large market opportunity, competition may grow, thereby pressuring Roku’s pricing power and margins. However, given the company’s growing leadership position, it seems unlikely for any competitor to displace Roku’s momentum anytime soon.
Our Takeaway on Roku Stock
A lot has changed over the last few months. However, Roku’s business remains attractive. The company’s powerful growth trajectory remains intact, and it may be accelerated the coronavirus.
Further, ROKU stock has fallen dramatically (as fearful investors hit sell), and the valuation has become more enticing. For these reasons, we recently included Roku on our ranking of top seven growth stocks.
In particular, ROKU stock has vast growth opportunities over the next decade, and the current share price is compelling.
As of this writing, Left Brain Investment Research has no positions in any of the aforementioned securities. However, affiliate companies Left Brain Capital Management and/or Left Brain Wealth Management are long ROKU, NFLX, DIS and AMZN. Readers can access the team’s full Roku research report here.