Roku(NASDAQ: ROKU) stock is still 86% off of its highs, but it got a little push last week when an analyst upgraded it. Are things finally starting to look up? It's already rebounding from its all-time lows, and now's the time to catch it on the way up. Here are three reasons not to miss this opportunity.
1. The compelling ad business
People know Roku for its hardware, or the streaming devices you can buy to connect a screen to a streaming account. It holds the top spot for devices in the U.S., Canada, and Mexico, and it's making a bigger splash internationally.
But the vast majority of Roku's revenue -- 85% in the second quarter -- comes from its advertising business. The ad business is also the more profitable business, accounting for all of the company's gross profit. The hardware segment, as strong as it is, serves the purpose of bringing more accounts into the Roku ecosystem so the company can capture more share of the streaming ad market.
It's doing a splendid job. Device sales increased 39% year over year in the second quarter, feeding into a 14% increase in household accounts over last year for a total of 83.6 million. More accounts create more streaming opportunities and hours, and viewing hours increased 20% year over year in the quarter.
Advertisers like these increases and are more likely to spend more of their budgets wherever more people are watching, which is why these numbers are so crucial for Roku. Practically speaking, more hours means more ads to stream and more money coming in from ad sales. Management announced a new initiative to place ads on the home screen, where all viewers start their streaming journeys regardless of whether they're going to watch a free, ad-supported, or premium network.
The ad business had been feeling inflationary pressure when partners cut their ad budgets. But the ad business is bouncing back. The market liked the company's recent announcement that it has made a new deal with The Trade Desk for ad partners to use its robust data analytics to optimize their ad campaigns. An analyst upgrade after the report triggered the recent jump in Roku's stock price.
2. Viewers keep cutting cords
The momentum is building. Viewers continue to cord-cut, or move from traditional viewing platforms to streaming, and Roku has an edge with its best-selling devices and free channels. Some percentage of cord-cutters aren't going to pay for a premium subscription, but they'll easily switch to Roku's free ad-supported network, which provides a myriad of options with streaming on demand.
Want proof? In the first quarter, streaming hours increased 23% year over year while broadcast hours fell 13%, according to Nielsen. Roku is uniquely positioned to benefit from this shift.
It's also poised to gain from cable TV subscribers moving over to streaming. According to Statista, U.S. pay-TV subscribers fell from 84 million in 2019 to 53 million in 2023. And in the most recent data from last year, 27% of U.S. and Canadian pay-TV subscribers were planning to cancel and move to streaming over the next six months. These cord-cutters need devices, and many are buying Roku's dongles and smart TVs, and creating accounts.
Management said that while viewing of the June 27 U.S. presidential debate on broadcast TV declined 30% from the first presidential debate in the previous presidential election year, more than 40% of Roku channel viewers tuned in to the live debate on Roku channels, and its free ad-supported TV channel had record engagement.
The trend is going to keep moving in Roku's favor if not accelerate.
3. It's still super cheap
Roku stock has been cheap for a while. It's down 26% this year alone for a combination of reasons that include growth that was slowing, a pressured ad business, and some potential competition. But as Roku keeps up its stride with robust sales growth and improving profitability despite the pressure, it's looking more and more like a bargain.
Roku stock trades at a price-to-sales ratio of 2.5, and it still looks like a deal at this price. If interest rates go lower this month as expected, Roku's business -- and stock price -- will benefit.
Should you invest $1,000 in Roku right now?
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku and The Trade Desk. The Motley Fool has a disclosure policy.
