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Stock Market Slump: Should You Really Buy Roku Stock?

Few stocks have suffered more in the bear market than Roku (ROKU -3.79%). After peaking at $490 per share in July 2021, it has lost about 85% of its value. For those who bought this stock near the peak, it may take years to recover such losses.

But despite Roku’s faults, investors may have good reason to start liking the stock again. Although investors should stay aware of its challenges, they should also consider the secular trends that could bolster the streaming service stock in the long term.

Why some investors may not like Roku stock

Admittedly, Roku’s business climate and performance appear discouraging. The challenges occurred at a time when supply chain constraints made it harder to bring its streaming players and Roku-equipped smart TVs to market.

Additionally, for all of the focus on its streaming platform, it derives most of its revenue from advertising. This bodes poorly as high inflation and a sluggish economy have discouraged spending, leaving businesses with fewer reasons to buy ads.

So severe is the ad slowdown that Roku only predicts 3% total net revenue growth in Q3 to $700 million.This is down from 18% in Q2 and 56% in the 2021 calendar year. The slower revenue growth and the bear market helped lead to the massive drop in the stock price.

Moreover, that stock price decline has taken its market cap under $10 billion. That places Roku in a weakened position. Peers such as Amazon, Alphabet, Apple, and Samsung also compete in this industry. The liquidity position alone of these companies is several times the value of all Roku stock. If these peers are motivated, they could invest enough to claim Roku’s market share or the company itself.

Roku’s continuing improvements

However, investors should also ask why such a small company has gained traction over these much larger peers. First, it helped that CEO Anthony Wood worked for Netflix while building Roku, which enhanced the first-mover advantage Roku built in this market. According to Conviva, Roku continues to benefit as it holds just under 31% of the global market share, well ahead of the second-largest streamer, Amazon, at 16%.

Furthermore, the streaming sticks are affordable and work well. Its Roku Express HD streaming player retails for just under $30 and has earned an average of 4.7 out of five stars from more than 166,000 reviews on Amazon. That compares well to $179 for Apple’s streaming player.

Additionally, despite the launch of the Roku Channel (which is not a paid service), Roku has served primarily as a neutral player among paid streaming services. This reduces the odds of bias toward a specific paid streaming service.

Its actions have led to an ecosystem that continues to draw the interest of advertisers and attract ad dollars from traditional TV. For the 2022-2023 season, it made deals with all seven major agency holding companies, leading to over $1 billion in commitments.

And contrary to expectations, this audience continues to grow even as consumers emerging from lockdowns spend less time online. Roku reported 63.1 million active accounts in the second quarter of 2022, 14% higher than year-ago levels. The average revenue per user (ARPU) also increased by 21% during that time frame to $44.10.

Investors should also remember that this has occurred during a “slowdown” in advertising. This means growth could increase as the economy and, by extension, ad spending begins to recover.

Finally, despite these improvements, the stock continues to become more affordable. Its price-to-sales (P/S) ratio has fallen to 3, down from 33 in early 2021.

Consider Roku stock

Indeed, the minuscule revenue growth amid a slowing economy and supply chain constraints bode poorly for Roku. However, upon closer examination, neither the trend away from online activities nor economic woes have stopped Roku’s growth. In fact, with almost 31% of the streaming market, Roku has made itself the largest beneficiary of a secular move away from traditional TV. As Roku recovers, these factors make it increasingly likely that this top growth stock is a screaming buy.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has positions in Roku. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Roku. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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