September isn’t usually a fruitful month for the stock market based on historical averages. Unsurprisingly, the S&P 500, Dow Jones Industrial Average, and Nasdaq indexes are all down around 2% so far this month. But shrewd investors shouldn’t worry and instead would benefit from looking for individual stocks that could be selling for attractive prices today.
Having lost 10% of its value in the first 20 days of September, Roku (NASDAQ:ROKU) is a booming business that should be on your radar. Crushing the market’s return since going public four years ago, this stock is shaping up to be the biggest streaming winner. And the current sell-off gives you the chance to buy shares at a sizable discount of 56% from Roku’s 52-week high.
Here’s why I’m so optimistic about this streaming innovator.
Riding the streaming wave
Roku’s founder and CEO Anthony Wood has built a three-sided ecosystem that consists of viewers who want all of their entertainment options in one place, content companies trying to reach the biggest audience, and advertisers seeking to target consumers that they can’t reach on traditional TV. Revenue of $645 million in the most recent quarter was 81% higher than Q2 2020, and Roku now has 55.1 million active accounts, demonstrating its ongoing success.
The $42-billion business has carved out a powerful position in the streaming space and stands to benefit as consumers cut the cord and streaming continues to become more popular. In the U.S., for example, it is estimated that a whopping 27% of households will ditch their cable-TV subscriptions by the end of 2021, only boosting Roku’s value proposition as a gateway to streaming entertainment.
And because Roku partners with numerous content providers, it doesn’t matter if Netflix, Disney+, or HBO Max ends up with the most subscribers. All three are offered on Roku’s platform, allowing the company to grow no matter which service wins.
High-margin platform revenue
What makes Roku’s business model particularly attractive is the burgeoning platform segment. A little over three years ago, this business line accounted for less than 50% of Roku’s overall revenue, with the company’s media sticks generating the bulk of sales at that time. Fast forward to today, and platform revenue of $535 million made up 82.5% of the business.
Why is this so important? Quite simply, it’s extremely high margin. In the most recent quarter, platform gross margin was 65% and has been trending higher over time. Roku is able and willing to sell its media players at cost or even at a loss with the goal of acquiring as many customers as possible, which the company can then monetize via ads on its platform.
This strategy is working extremely well, as Roku’s previously mentioned 55.1 million active accounts streamed an incredible 17.4 billion hours of content in Q2. And the average revenue per user, a critical metric for any subscription-based business, was $36.46, up 46% year over year.
As the platform segment keeps growing, expect Roku’s profitability to skyrocket in the years ahead.
Massive growth potential
There are currently just over 1 billion cable-TV households and nearly 1.2 billion broadband-enabled households worldwide today, so Roku’s potential is huge, even if it only taps a small percentage of this global opportunity.
Roku owns about one-third of the smart-TV market in the U.S. and Canada, countries that the company believes are leading the world when it comes to streaming penetration. Management is using a similar strategy that worked so well domestically in international markets — by acquiring as many customers as possible, driving engagement, and then monetizing with targeted ads.
Besides the U.S. and Canada, the business sells its media players in the U.K., France, Ireland, Mexico, Brazil, and numerous other Latin American countries. Additionally, Roku sticks will be offered in Germany later this year. If we use Netflix’s overseas success and 209 million members as a rough guide, Roku’s platform, with its unwavering focus on the user experience, will probably do just fine expanding internationally.
Sell-offs create buying opportunities
Don’t let the market’s historically poor showing in September turn you off as an investor. If you stay focused on the long term, periods of underperformance provide chances to buy outstanding companies on sale. As I’ve laid out above, Roku is one such business that you want to seriously consider, now that its stock price has taken a major hit.
The streaming leader is growing on the back of the cord-cutting trend, generates valuable, high-margin platform revenue, and still has a large growth opportunity ahead. Roku is well on its way to becoming the biggest streaming winner, so don’t regret not scooping up shares today.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.