- Roku (ROKU) stock bounced in March
- It’s now valued at less than 7 times revenue that grew 55% last year
- If controlling stockholder Anthony Wood decides to sell, there are lots of buyers
Roku (NASDAQ:ROKU) stock got off the floor in March as growth stocks became the new market battlefield.
Shares bounced off a low near $100/share in mid-March, opening March 30 at about $137. At that price, Roku has a market capitalization of $17 billion on 2021 revenues of $2.7 billion. That means investors are paying roughly 7.05 times sales to own the streaming company. Roku even achieved positive earnings in 2021, but the price to earnings ratio is still high at 80.
Before this month, Roku stock endured a sickening fall. It was trading at $729/share in late July. But the fall wasn’t based on a change at the business. It was all due to investor sentiment. If investors want growth again, Roku stock is due for a major bull run.
Roku was founded by Anthony Wood, who previously sold a Digital Video Recorder called ReplayTV. It offers video streaming technology, built inside sets or as an add-on. But as the company’s latest quarterly report makes clear, the big money is in operating the resulting streaming platform.
Roku nearly doubled its platform revenue in 2021, to $2.3 billion. Revenue from selling its player technology fell, from about $510 million to about $480 million. The platform earned $1.46 billion during the year while the player business lost $52 million.
Roku streams basic cable channels for free and offers its own programming. It began the exclusive content push by buying Quibi, a failed short-form video venture. Roku is now building its own production studios in Santa Monica.
The key metric for investors is average revenue per user (ARPU), which was about $41 last year. The money comes from advertising and from selling subscriptions to paid streaming services. This gives Roku power as Walt Disney (NYSE:DIS), Netflix (NASDAQ:NFLX), Warner Discovery (NASDAQ:DISCA), Paramount Global (NASDAQ:PARA) and Comcast’s (NASDAQ:CMCSA) Peacock compete for viewers.
Roku is also an advertising company. It gets inventory on the channels it offers but sees more growth coming from its own Roku Channel. That means it is spending more on advertising technology and on content.
Roku’s strength lies in its market share. Roku’s weakness lies in the fact that this is almost entirely U.S. and Canadian market share.
Roku stock doesn’t exist in a vacuum. The stock in all streaming stocks, both platforms and programmers, are down over the last year. Roku is down by more because the North American market is mature. The big growth is coming in markets where Roku is weak. That’s why 3 of the 18 analysts following Roku stock at Tipranks are telling clients to sell it.
Roku is also down hard because its players compete directly with those of well-capitalized Cloud Czars. Amazon.Com (NASDAQ:AMZN) has as much U.S. market share as Roku with its Fire streamer, as well as Prime Video streaming service. Alphabet (NASDAQ:GOOGL) and Apple (NASDAQ:AAPL) also sell streaming equipment and Apple is now investing in the programming side of Apple TV. Roku bears believe the Czars will eventually win the “streaming wars” thanks to their global reach.
The Bottom Line
The bull case for Roku is that it’s the gatekeeper for a huge market that big companies have to have. It’s also a bet that Wood is a good card player who will know when and how to sell out.
If Wood does decide to sell, there would be many willing buyers. Disney, Netflix, or Comcast could use Roku to checkmate their rivals. Walmart (NYSE:WMT) might also buy it to compete more directly with Amazon Prime.
If you’re interested in it, now is the time to buy Roku.
On the date of publication, Dana Blankenhorn held long positions in GOOGL, AMZN, and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.