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).
More than 10% of Roku (NASDAQ:ROKU) shares were recently sold short. One popular short-seller narrative is that investors are so overly exuberant about the company’s incredible long-term growth potential that any short-term hiccups will cause the shares to sell off hard. However, that short-term hiccup has arrived in the form of uncertainty caused by the novel coronavirus.
And even though stay-at-home behaviors caused Roku’s recent quarterly revenue to accelerate even more dramatically than expected, CEO Anthony Wood has decided to temporarily take his foot off the gas. Why? Because overall advertising expenditures in the U.S. are likely to fall in 2020.
What Is Roku?
If you don’t know, Roku is a pioneer in streaming TV. The company should grow dramatically in what it calls the “streaming decade” — which has only just begun.
Roku’s value lies in its smart TV operating system which is solving the complications of TV advertising in a steaming world (as we wrote about in great detail in our previous Roku articles here and here). And incredibly, Roku’s products and services “have increased in relevance to consumers and industry partners during a time when most of the population is staying at home.”
What Has Changed Since Last Quarter?
From a financial standpoint, many short-term investors are disappointed that Roku now expects an adjusted EBITDA loss for fiscal year 2020. This is thanks to pandemic-related operating adjustments.
However, we remain focused on the incredible long-term positives. We’re not just talking about the year-over-year new account growth rate of more than 70%, or the year-over-year streaming hours growth rate of roughly 80%.
And while we are big fans of CEO Anthony Wood, and we are encouraged by his prudent decision to slow the growth rate of operating and capital expenditure as near-term advertising uncertainty remains high due to Covid-19, we are most excited by the massive long-term growth potential.
What Remains the Same?
Roku’s massive growth opportunity remains fully intact. Specifically, the company’s market-leading position within the streaming TV market is exciting. This market is young, but it’s massive — and it’s seriously growing. For example, the global video streaming market is expected to reach $184.3 billion by 2027, according to a report by Grand View Research. That’s a compound annual growth rate of 20.4% from 2020 to 2027.
And we know this is an incredible opportunity simply by the fact that Amazon (NASDAQ:AMZN), Disney (NYSE:DIS), Apple (NASDAQ:AAPL) and Netflix (NASDAQ:NFLX) are all investing heavily in the space. And these industry players magnify Roku’s value proposition as they increase consumer interest in switching from traditional TV to steaming TV. Ultimately, it also increases consumer interest in Roku’s platform, which already comes installed on roughly a third of all smart TVs sold in the United States. Furthermore, as CFO Steve Louden said during Roku’s previous 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 considering most consumers still watch TV the old-fashioned way, that leaves a lot of room for growth in steaming in the years ahead.
Best Stocks: The Bottom Line on ROKU Stock
Despite Roku’s recent decision to slow spending due to Covid-19 uncertainties, revenue continues to grow rapidly. And the company’s massive long-term growth opportunity remains intact.
In fact, the pandemic is actually accelerating the important shift from traditional to streaming TV. Furthermore, as more TV brands move to a licensed operating system approach, cord-cutting will continue to increase the shift of billions of dollars in advertising to streaming. Roku will benefit enormously in the years ahead.
Roku’s share price has not risen in accordance with its continuing rapid sales growth (it now trades at only 7.7 times forward sales estimates) and its huge long-term market opportunity. For these reasons, we included Roku on our list of Top 15 New Reality Stocks. In our view, if you are a long-term growth investor, now is the time to load up on shares of Roku.
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, AAPL and AMZN.