Roku Stock: Buy the Dip in Best Streaming Stock in the Market

Streaming giant Roku (NASDAQ:ROKU) stock sold off despite posting strong third-quarter numbers. Despite healthy revenues and user monetization improvements, ROKU stock is now oversold and presents a great entry point in the streaming realm.

media stocks to buy roku
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So why has the stock dipped? Roku’s active accounts came in slightly below Wall Street estimates. Roku’s third-quarter active accounts came in at 56.4 million, while the Street estimates were 56.7 million. That, combined with the management’s soft fourth-quarter outlook, weighed down the stock.

Nevertheless, investors should ignore these short-term hiccups and understand the incredible growth machine that is Roku. Analysts expect it to grow significantly faster than Netflix (NASDAQ:NFLX)  and become the frontrunner in the streaming space.

The recent drop in value is a great opportunity for investors to scoop up the stock at a discount.

Strong Third-Quarter Earnings

Roku’s third-quarter earnings failed to beat estimates on revenue growth but nevertheless enjoyed solid revenue growth and user monetization. The company’s third-quarter sales rose 51% from the prior-year period to a record $680 million. Moreover, gross profits shot up at an even faster rate at 69% to roughly $364 million.

Platform margins were impressive at 65%, while the company’s income from operations rose by almost 6x on a year-over-year basis. Active accounts surged to 56.4 million, growing 23% from the prior-year period, and the company added a healthy 1.3 million in new accounts during the quarter. This equates to 433,000 new active accounts each month.

Streaming hours climbed back during the quarter after dipping during the second quarter. The company also experienced amazing growth in its average revenues per user, surging 49% on a year-over-year basis to $40.10.

Looking Ahead

Roku’s fourth quarter is likely to be challenging for the company. Revenues from the company’s player segment were down due to component shortages. These issues have also resulted in a spike in prices for televisions that come with Roku TV pre-installed, which may impact the demand during the holidays.

Moreover, the Roku player devices witnessed an average price drop of 7% year-over-year against higher components costs. On top of that, the lower selling prices and investments are likely to pressure profitability in the upcoming quarter. Additionally, the broader headwinds in the economy have a few sectors reevaluating their advertising budgets. Consequently, digital ad sales are likely to be significantly lower on the Roku platform.

Nevertheless, Roku is expected to grow faster than Netflix in the next five years. That is partly because Roku is currently smaller than Netflix. After the third quarter, Netflix had close to 213.5 million paying subscribers during the third quarter and grew its accounts by 9% from the prior-year period. Though Roku has just 25% of Netflix’s subscriber base, it generated a healthy 23% account growth on a year-over-year basis.

Roku’s average revenues per user growth during the third quarter were 49% on a year-over-year basis, significantly ahead of Netflix’s 7% growth in average revenues per membership. Moreover, Roku expects to expand its sales to $3.8 billion in 2022 and $5 billion in the year after that. Hence, due to improving user monetization and healthy growth in customer signups, Roku is a much better deal than Netflix.

Bottom Line on ROKU Stock

ROKU stock’s post-earnings dip presents an excellent opportunity for investors to take a position in perhaps the pick of the streaming stocks in the future. The company continues to grow at an impressive pace and is likely to weather its short-term tailwinds and speed past its competition in the future.

ROKU stock represents an excellent long-term proposition in the lucrative streaming space.

On the date of publication, Muslim Farooque 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 Publishing Guidelines.

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