I’ve heard the same argument for Roku (NASDAQ:ROKU) stock at $30 as I did when it neared $500: “It’s just a stick, this is crazy!”
No, it’s not just a stick. But the continuous doubt combined with the inability to understand the business is part of what’s allowed Roku stock to surge over the last few years.
Specifically, Roku is sporting one-year gains of 230% and three-year gains of roughly 770%.
That’s even after the stock corrected by more than 40% from the highs amid a nasty bear-market correction in growth stocks. While these types of corrections often leave investors scared and feeling vulnerable, they’re precisely the time to do some buying.
The key is buying high-quality growth stocks. Roku fits the bill. So does Twilio (NYSE:TWLO), Shopify (NYSE:SHOP), The Trade Desk (NASDAQ:TTD) and others. But the point is simple: Don’t run from big corrections, run to them when the time comes.
Breaking Down Roku
Many investors are missing the boat with Roku stock. Their problem? A majority of investors incorrectly think of Roku as its product — the streaming stick or smart TV — instead of Roku as its platform.
The platform is what’s driving growth. It’s what’s driving profits, market share and most importantly, Roku’s future opportunities.
The hardware side of the business is not Roku’s focus. The company offers a number of products, from HD streaming boxes and streaming sticks to surround sound systems. The company is also in most of the top smart TVs brands.
Why? Because now smart TV producers don’t need to build their operating system (OS). Instead of having a clunky, inefficient OS, they can simply use Roku’s OS and customers get what they want.
However, all of these hardware applications are built to do one thing: To act as a gateway for the Roku platform.
The company generates ad revenue from its free Roku channel. It also generates recurring revenue when customers sign up for streaming services via the platform. For instance, if I sign up AT&T’s (NYSE:T) HBO Max via Roku, the latter gets a slice of the revenue each month.
As streaming continues to grow, this is where Roku is extracting its leverage. As it dominates market share, its growth continues to balloon. It’s exactly why I said Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) should have bought this company when it had the chance.
That growth is forecast to continue, too. So far, analysts have been wildly conservative with their expectations, so I expect long-term estimates to be too conservative as well. As it stands though, expectations call for 55% revenue growth this year and almost 40% growth next year. Earnings estimates call for triple-digit growth both years (including 400% growth in 2021).
Have We Seen the Low in Roku Stock?
Roku clearly has growth and its latest earnings report shows why I believe estimates remain too low.
Revenue of ~$574 million beat estimates by almost $83 million, coming in roughly 17% higher than consensus estimates. That was up almost 80% year over year. A surprise profit of 54 cents per share crushed expectations by 67 cents. Revenue estimates for next quarter torched expectations as well ($615 million at the midpoint vs. expectations of ~$546 million).
Sheesh. It shows that Roku is growing way faster than analysts can keep up with. Despite this obvious observation, the stock has been pummeled thanks to the bear-market correction in growth stocks. From peak to trough, Roku stock fell 44%.
Now on the mend, the stock gave bulls a nice bounce off the 200-day moving average. Currently contending with a handful of moving averages, investors now want to see the stock buck the recent trend of lower highs and swing over $358.
That will also put Roku stock above all of its key moving averages. If it can do that, $400 isn’t out of the question. If the stock gets to $400 and starts to trade better, that gap-fill level up near $434 is a possible intermediate-term target in the future.
Shares trade at roughly 16 times this year’s sales estimate. That’s a tad lofty, but I don’t think it’s a bad price for what is a premiere growth stock of this new generation. Plus, 11.5 times next year’s revenue isn’t bad at all in this case.
On the date of publication, Bret Kenwell held a long position in ROKU, TWLO, SHOP and TTD. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.