4 Reasons to Buy Roku Stock

Streaming giant Roku (ROKU 0.96%) is on fire. The company’s shares delivered returns above 100% for a brief period not so long ago, although it has since given back some of these gains. Still, Roku has been almost unstoppable all year, which seemed unlikely nine months ago, given the headwinds it encountered in 2022.

Have investors missed the boat? The answer is a resounding no. In fact, there are still plenty of excellent reasons to buy the stock right now. Let’s consider four of them.

ROKU data by YCharts.

1. The streaming industry has a long way to go

Tens of millions of people grew up watching traditional cable, but streaming has changed things for younger generations. While cable isn’t dead yet, the cord-cutting trend is alive and well and will continue.

Streaming will almost certainly take over; it’s only a matter of time. Streaming is better adapted to the world as we know it today and as it continues to evolve.

Streaming allows people to watch shows on demand on various devices (wherever they want, as long as they have a Wi-Fi connection). Gone are the days of being stuck watching boring movies on a long flight. People can whip out their phones, tablets, or laptops and binge-watch their favorite series on Netflix, Amazon Prime Video, or Disney‘s Disney+ or on Hulu, which is owned by Disney and Comcast.

These series are also created with viewers in mind. Many streaming giants use data on viewer habits to drive their content creation.

So, expect streaming to become the norm, but it won’t take just five or 10 years. Even in the markets where it has the most penetration, streaming is still far from generating even half of television viewing time. In the U.S., it accounted for just 36.4% of viewing time in May.

It could take a couple of decades or longer before streaming hits its peak, and Roku could be one of the winners in this massive shift. 

2. Roku will win no matter which service dominates

One of Roku’s strengths is that it doesn’t need to compete directly with Netflix or Hulu. Its platform plays host to most of the streaming giants. Whichever streaming service viewers choose plays right into Roku’s hands.

The Roku Channel, where the company offers a slew of shows and movies for free including original creations, has been growing in popularity. According to Nielsen, it accounted for 1.1% of television viewing time in the U.S. in May. It was the first time The Roku Channel earned a spot on this list.

But while Netflix’s business would crumble if people stopped watching Netflix, that isn’t the case for Roku. As the streaming war continues to heat up, The Roku Channel may or may not grow in prominence, but Roku the company should. 

3. Roku’s deepening engagement 

Roku had 73.5 million active accounts at the end of the second quarter, a 16% year-over-year increase. The company recorded 25.1 billion viewing hours, 21% higher than in the prior-year quarter.

Both metrics have grown steadily over the years. It’s an important factor since Roku makes much of its money through ads. The more viewers on its platform, and the more time they spend on it, the more it becomes attractive for companies to advertise products through it.

Roku’s deepening engagement is crucial to the company’s long-term prospects, and so far, it has performed well on that front. 

4. Its potential for higher margins 

Roku operates across two major units: its player segment and its platform segment. Within the former, it records sales of its namesake streaming devices.

Advertising revenue, as well as other sources of revenue — such as the licensing of its operating system and agreements with streaming services to include buttons on its remotes that link directly to their channels — all fall under the company’s platform unit.

Manufacturing streaming devices, as with most electronic gadgets, is expensive, so this business carries lower margins for Roku than the platform segment. In the second quarter, Roku’s player segment was not profitable on an operating basis, while its platform business had a gross margin of 53.2%.

Here’s what that means: As Roku’s active accounts and viewing hours grow — and its platform revenue accounts for an even larger part of its total top line — there is a good chance that its gross margins will improve, too.

Even with a decline over the past year and a half, gross margins have generally increased.

ROKU Gross Profit Margin Chart

ROKU gross profit margin data by YCharts.

The pandemic years and the subsequent economic troubles have made the recent past a bit abnormal for Roku. But the company’s margins could strengthen over the long run. 

Buy and forget 

Roku’s strong performance this year is due to the rebound in the advertising industry and an improving economy that could remain a tailwind for the next year if they keep up. But for long-term investors, there are much better reasons to buy the stock.

Roku is a leader in an industry with miles of growth left ahead as it only becomes more popular. The company should deliver excellent returns to patient investors willing to hold its shares for 10 years or more.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Prosper Junior Bakiny has positions in Amazon.com and Roku. The Motley Fool has positions in and recommends Amazon.com, Netflix, Roku, and Walt Disney. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

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