A Few Years From Now, You'll Wish You'd Bought This Undervalued Stock

Roku (NASDAQ: ROKU) has had its share of struggles over the years, including rising expenses, slowing growth in some segments of its business, and increased competition. As a result, the entertainment stock trades down by more than 87% from its 2021 high, and mounting losses have likely stopped investors from bidding it higher even as the market improved.

While the stock hasn't performed, the number of households using Roku's operating system continues to grow. Consequently, as market conditions increasingly line up in Roku's favor, its stock could return to growth.

Why Roku?

Roku has built a TV ecosystem that brings advertisers, content companies, and viewers together. This has become increasingly important as its viewing base shifts from traditional TV to streaming platforms. Its approach has allowed it to capture many of these customers and withstand competition from industry heavyweights such as Google parent Alphabet , Amazon , and Samsung.

Moreover, even though it has created an ad-supported channel, it has generally avoided direct competition from any of the paid content providers. This builds consumer trust by giving it a level of neutrality that most of its peers do not have.

Consequently, it is the No. 1 selling TV operating system in the U.S. and Mexico, representing around 40% of all TVs sold in each country. Such competitive gains bode well for its long-term performance.

Also, as of the end of the first quarter of 2024, its active customer base has risen to almost 82 million households, a 14% increase year over year. Those households view 23% more content compared to one year ago, with streaming hours for the quarter approaching 31 billion.

Roku's financials

Furthermore, revenue growth seems to have caught up with the platform's higher usage. In the first quarter of 2024, revenue of $881 million rose 19% from year-ago levels, well above the 2023 growth rate of 11%.

Admittedly, the cost of revenue exceeds revenue growth. Still, since Roku slashed its operating expenses and the net loss for Q1 fell to $51 million, far less than the $194 million loss in the year-ago quarter.

Despite improvements, the stock's gains over the last year reversed over the previous year. Most of the drop came because of Walmart 's pending acquisition of Vizio , a move that would make the retail giant a Roku competitor.

However, Walmart is not Roku's first large competitor. Moreover, Roku has responded by forming a partnership with The Trade Desk . This partnership combines The Trade Desk's media buying tool with Roku's audience and behavioral data. Such an alliance should bolster Roku's competitive advantage in advertising, the business likely most critical to its ultimate success.

Investors can also benefit from the company's rock-bottom valuation. The price-to-sales (P/S) ratio , which exceeded 30 in early 2021, has fallen to around 2.5. In some respects, this makes Roku a value stock. Assuming it becomes a growth stock again, it could see increasing stock gains because its financials will have improved.

Investing in Roku stock

With that heavily discounted valuation, Roku looks increasingly like a stock to buy. Admittedly, the stock failed to recover along with other tech stocks over the last year, and the ongoing losses are likely a source of frustration for investors.

Nonetheless, Roku continues to succeed against some of the largest and best-funded companies in the world. Also, its ability to grow its number of users and keep them on the platform for longer should bode well as its revenue growth improves.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Will Healy has positions in Roku and The Trade Desk. The Motley Fool has positions in and recommends Alphabet, Amazon, Roku, The Trade Desk, and Walmart. The Motley Fool has a disclosure policy .