Some might say that the buying window for Roku (ROKU 1.16%) stock is closing. Shares of the media-streaming technology pioneer have gained roughly 70% in less than four months. By comparison, the S&P 500 (^GSPC 0.57%) index gained 20% over the same period. Wall Street analysts aren’t excited about this stock, and the average price target sits 7% below Roku’s current price. And the company isn’t even profitable, so how high can that stock chart go anyway?
Despite these perfectly reasonable misgivings, I still see a neon sign in Roku’s stock, flashing “buy me now” messages for the world to see. Let me explain why my view of Roku differs from the lukewarm market mood. Please take notes because you may want to buy some Roku stock at the end of it all.
Roku’s channel-changing fortunes
Roku’s stock may have surged recently, but it’s actually down by a hair-raising 78% over the last three years. While the stock market as a whole struggled in 2022 and soared in 2023, the inflation crisis unleashed a persistent downturn in the digital advertising market. As a leading provider of digital ad space, Roku saw its stock lumped together with digital marketing specialists such as Magnite (MGNI 2.04%) and PubMatic (PUBM 2.13%). This group of next-generation advertising stocks didn’t get to participate in the S&P 500’s 28% gain over the last three years:
That’s fair enough — if you assume that the advertising downturn struck every major player with devastating force. It didn’t.
Yes, Roku’s top-line growth slowed down considerably in this period. Ad buyers don’t want to buy a lot of ad space when consumer budgets are tight.
And Roku’s flagellation included some entirely voluntary pain, too. While rivals in the advertising and consumer electronics markets boosted their prices in order to cancel out the effects of inflation, Roku held its prices steady amid a period of heightened price sensitivity.
As a result, the company added millions of new users as competitors barely held on to their existing customer lists. Roku had 75.8 million active user accounts in the third quarter of 2023. That’s a 34% increase in two years and 65% in three years — in the middle of a full-blown industry crisis and a weak economy.
Roku’s ad-venture: Mastering the digital ad downturn
Roku didn’t just survive that challenging era but is thriving at the end of the tunnel.
It’s almost as if management wanted to poke fun at bearish Roku investors at this point. The company is ready to run whenever ad buyers get to manage robust budgets again. I can’t wait to see the stalled revenue growth springing back to life, fueling some healthy bottom-line profits at long last.
Judging by early reports from fellow ad experts, the rebound may have started in the fourth quarter. Google parent Alphabet‘s (GOOG 2.04%) (GOOGL 2.12%) ad sales rose 11% year over year after a 4% drop in the year-ago update. French ad campaign optimizer Criteo (CRTO -0.71%) saw 12% revenue growth after deducting traffic acquisition expenses (ex-TAC), inspiring a 20% stock price jump the next day.
Roku’s holiday-quarter report is scheduled for Thursday evening, February 15. I can’t promise a blowout report, but many signs are pointing in a bullish direction. You should consider picking up a few Roku shares before this event. This little media technologist is going places in the long run, and you don’t want to be left empty-handed as the growth story gains traction again.
Long story short: Yes, Roku looks like a fantastic buy today.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Alphabet, Criteo, and Roku. The Motley Fool has positions in and recommends Alphabet, Magnite, PubMatic, and Roku. The Motley Fool recommends Criteo. The Motley Fool has a disclosure policy.