Roku stock is down now, but could rise 10x

Few stocks fell as much during the 2022 tech crash. Roku (NASDAQ:ROKU).

From peak to trough, Roku shares fell more than 90% as stocks and industries that thrived during the pandemic collapsed upon reopening. streaming media It’s one of them.In such cases as Netflix (NASDAQ: NFLX) Roku has also been a casualty of this trend, after surging during the pandemic and then floundering in 2022.

The company’s business is primarily driven by streaming growth and digital advertising, both of which are set to slow significantly in 2022. Meanwhile, Roku ramped up spending, leading to widespread losses. The chart below shows how the company’s revenue growth plummeted and profits swung to a loss during this period.

ROKU revenue (quarterly annual growth) chart

ROKU revenue (quarterly annual growth) chart

Revenue growth fell sharply in 2022, remaining essentially flat for two consecutive quarters before rebounding recently. Adjusted interest, tax, depreciation and amortization advance profit (Interest, tax, depreciation and amortization advance profit) followed a similar trajectory, and excluding costs related to layoffs, the third quarter was actually positive for the first time in several years.

A person holds a remote control in front of a smart TVA person holds a remote control in front of a smart TV

Image source: Getty Images.

A rally is underway

Roku stock is still down about 80% from its pandemic peak, but the business is clearly moving in the right direction.

In the third quarter, the number of active accounts on the platform increased by 16% to 75.8 million, and the number of streaming media hours increased by 22% to 26.7 billion, showing that the usage of the platform continues to grow steadily, and revenue growth also increased to 20%. This was the fastest growth rate in six quarters, driven by a recovery in advertising demand.

Roku has trimmed its cost structure after three rounds of layoff losses, allowing it to return to positive adjusted EBITDA after several quarters of adjustment. Roku reported third-quarter EBITDA profit of $43 million on revenue of $912 million.

But it’s not just the company’s own data and growing demand for digital advertising that’s driving the company’s recovery.

Ad-based streaming finally goes mainstream, now with Netflix disneyand Amazon are all accepting it. Consumers are craving this option, too. Netflix said in its fourth-quarter earnings report that the number of ad-based subscribers increased 70% from the previous quarter, and that 40% of new signups came from the ad-based tier that can be selected.

This is good news for Roku, as the leading streaming platform typically gets 30% of its ad inventory from its streaming service partners. So the more ad-tier signups they get, the more money ultimately goes to Roku.

Why Roku is 10x better

It’s not easy for any stock to rise tenfold, but Roku has a chance to do just that. The market for video entertainment is huge; streaming accounts for less than half of video consumption in the United States, and much less in other countries. Market share will continue to grow from linear TV to streaming.

The stock is small in size, reasonably priced, and has room for 10 times appreciation. First of all, its market value is US$13 billion, and its market value will reach US$130 billion in the next ten years, which does not seem unreasonable for the streaming media leader. distribution platform, especially if Roku can maintain its user growth rate.

The company isn’t profitable yet, but its price-to-sales ratio is below 4, a modest enough level to give the stock upside potential.

If Roku can grow its revenue 20% over the next decade (which seems achievable given the shift from linear to streaming and the acceptance of ad-based streaming), its revenue will grow nearly sevenfold , up from $3.45 billion to $21.4 billion. If its price-to-sales ratio expanded to 6 (which could easily happen, as the business would likely become profitable by then), the share price would be multiplied by 10x. At 10% margins, Roku stock would trade at a high P/E of around 60, which is high but not unusual for a fast-growing market darling.

The opportunity is there if Roku executes. It will need to continually acquire new users, capture market share and build ad inventory with the help of streaming partners, but it looks to be one of the best prospects for 10x growth over the next decade.

Should you invest $1,000 in Roku right now?

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John Mackey is the former CEO of Amazon subsidiary Whole Foods Market and a board member of The Motley Fool. Jeremy Bowman Holds positions at Amazon, Netflix, Roku, and Walt Disney. The Motley Fool has positions and recommendations at Amazon, Netflix, Roku, and Walt Disney. Motley Fool at disclosure policy.

Roku stock is down now, but could rise 10x Originally published by The Motley Fool

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