Recent, positive news for Roku (NASDAQ:ROKU) — along with a further, unjustified drop in ROKU stock in the last few weeks — have again enhanced the shares’ attractiveness for long-term investors.
Among the news is the company’s achievement for the second straight year of “top-dog” status in the U.S. market, a new partnership with Sharp (OTCMKTS:SHCAY), the expansion of its ad business to Mexico, the general improvement in global supply chains and very upbeat notes by two Wall Street research firms.
Meanwhile, the retreat of Roku’s shares is irrational. The drop is mostly attributable to Netflix’s (NASDAQ:NFLX) recently reported fourth-quarter results.
The U.S. Leader, Expansion to Mexico and New Partnerships
On Jan. 3, Roku, citing data from independent research firm NPD, reported for the second straight year it was the leading “smart TV OS” in America. Moreover, according to the website protocol, which cited data from streaming analytics company Conviva, Roku’s global streaming hours climbed a respectable 12% in 2021.
Entering new countries is a good way for Roku to meaningfully increase its streaming hours and ultimately its financial results. So the company’s recent decision to expand its ad business into Mexico is a good sign for the company and for ROKU stock. According to Seeking Alpha, the country is “a big market where streaming is becoming more mainstream.”
The move also indicates the company will expand to additional, promising nations over the medium term and the long term. That trend should be positive for ROKU stock investors.
Another way for Roku to raise its user metrics and financial results is by partnering with more major TV makers. So the company’s announcement that it had made a partnership deal with the giant Japanese TV maker Sharp is also very good news for the stock.
In the last year, Roku has also made partnership deals with JVC, Philips (NYSE:PHG) and Westinghouse. Cumulatively, those alliances have effectively refuted the bears’ assertion that Roku only partners with the makers of cheaper, smaller TV brands.
Supply Chain Improvements and Analysts’ Notes
Roku’s supply chain issues were a key drag on its third-quarter results. Any improvements in global supply chains is great news for the company and ROKU stock. Reuters reported last month, “Supply constraints are starting to ease and a measure of prices paid for inputs by factories fell by the most in a decade.”
Meanwhile, on Jan. 20, Seeking Alpha quoted Deutsche Bank (NYSE:DB) as saying that the decline of ROKU stock was “overdone.” Moreover, the firm thinks that the company is “well positioned” and could get a boost from its Q4 results, due to be reported later this month. The firm cut its price target on the shares to $300 from $400, but its new price target is double the current price of the shares.
Also upbeat on the shares was Vertical Group, which says it has a “high conviction bullish” view of the stock. The firm’s optimistic outlook is driven by its belief that the ad market is bouncing back.
Netflix Is Not a Good Comparison for ROKU Stock
In recent weeks, ROKU stock has dropped due to Netflix’s poorly received Q4 results. Roku’s business is very different from that of Netflix’s though for two reasons. First, unlike Netflix, Roku is not being hurt by the greatly increased competition in the streaming space. Since Roku obtains meaningful ad revenue from streaming channels, its results should be lifted by the battles in the sector.
And secondly, while Netflix’s business model relies on subscriptions, Roku’s revenue comes primarily from advertisers. Consequently, I believe that the strong Q4 results of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), which also derives its revenue primarily from ads, are a much better read on Roku and ROKU stock.
The Bottom Line on ROKU Stock
Roku’s shares have dropped to a very reasonable forward price-t0-sales ratio of eight, while the company generates profits and has multiple, strong, positive catalysts.
Therefore, I continue to recommend that long-term investors buy the shares on weakness.
On the date of publication, Larry Ramer 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.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
