After blowing away analysts’ expectations with its first quarter results, now is a great time for investors to put money into Roku (NASDAQ:ROKU) stock.
The company, which manufactures television sets that can connect to wireless internet and stream video content directly, saw its shares jump 7% immediately after reporting a surprise first-quarter profit.
ROKU stock has now risen 20% since its first-quarter results were announced on May 7. Yet the stock still looks undervalued at its current price of around $340.
Roku’s share price is still down 30% from its 52-week high of $486.72, reached in February, and the median price target on the stock is currently $460 a share, suggesting the potential for a 35% gain from current levels.
With the stock trending higher, investors may want to step on the escalator now and ride ROKU stock to profits over the short- and medium-term.
Surprise Profits and Roku Stock
What has Wall Street fired up over Roku was the surprise profit the company reported for this year’s first quarter. The company announced a first-quarter profit of $0.54 cents a share on revenue that rose 79% year-over-year to $574.2 million.
Analysts expected the company to report a loss of $0.13 per share on revenue of $491.6 million. Strong forward guidance also generated excitement. For the current second quarter, Roku forecasts total net revenue of $615 million versus analyst expectations of $550 million.
The shock profits had Wall Street firms scrambling to upgrade their ratings on ROKU stock. Loop Capital Markets upgraded the stock to a “buy” rating with a $450 price target, noting that the company added 2.4 million new accounts in the first quarter to reach a total of 53.6 million.
Analysts also singled out the fact that Roku users spent 1.3 billion more hours watching streaming content through its platform in the first quarter of this year than in the final quarter of 2020 — 18.3 billion hours watched versus 17 billion hours.
That reinforces the bullish case that streaming content direct to internet-enabled television sets without the need for another device is the future.
More Accounts & Revenue
A deeper dive into Roku’s numbers shows that the company is gaining new accounts at an exceptionally fast clip. In the past two years, the company’s number of active accounts doubled to 53.6 million, and the number of active accounts continues to grow at a 35% annual rate.
If Roku can maintain its current growth, the company’s number of active accounts will double again in less than three years from now.
Equally impressive, Roku is earning more money per account. Average Revenue Per User (ARPU) at the end of this year’s first quarter stood at $32.14, up 32% from the same period of 2020. Roku’s ARPU rate has risen quarter-over-quarter since Roku held its initial public offering (IPO) in 2017.
The constant increase has been due to advertising dollars moving away from traditional media to connected TV devices such as the ones made by Roku. Roku has a growing audience for its streaming platform, and advertisers are lining up to spend money on it.
Roku’s gross margin has also improved in four consecutive quarters and stood at 56.9% in this year’s first quarter, which was a record high for the company. Roku says the goods and services it provides are getting cheaper while its revenues continue to expand, which is improving its profit margins and led to the surprise earnings beat announced in May.
Buy ROKU Stock Before It Goes Higher
If there’s one technology company that Wall Street is bullish about right now, it is Roku. While many other tech stocks continue to have depressed share prices, ROKU stock is marching higher and investors should get in now while the entry price is still attractive.
It’s worth noting that Roku’s shares are currently trading at a forward price-to-sales ratio of 14.85, which remains down considerably from their peak of more than 24 at the end of 2020.
While many technology stocks remain on the sidelines, with the Nasdaq Composite stock index down 3% since April, ROKU stock is bucking the trend.
The company is a leader when it comes to connected television sets that allow people to directly stream their favorite shows and movies, and its earnings reflect a company that is firing on all cylinders.
With strong growth expected to continue for the foreseeable future and the company now profitable, there has never been a better time to invest. Roku is a buy.
Disclosure: On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
