1 Growth Stock Down 89% to Buy Right Now

Investors have been tuning out of Roku (NASDAQ: ROKU). Shares of the streaming video pioneer have plummeted 89% since peaking in 2021. Its latest step down came on Friday, when the stock tumbled 10% following a poorly received financial update.

The silver lining here is that actual viewers aren't tuning out as Roku continues to grow its audience and engagement. Bears have a case, given the company's lack of recent profitability and the long-term challenges that await a platform competing against larger players to serve as the streaming hub in your living room.

Let's give the bulls a shot here, too. The stock would have to be nearly a nine-bagger to return to the all-time highs it scored three summers ago.

No one is suggesting that will happen anytime soon. The migration from linear television consumption to streaming continues for both viewers and advertisers, and Roku remains in the pole position until it gets bumped off the track.

California streaming

The headline numbers for Roku's first quarter are decent. Revenue rose 19% to hit $881.5 million, well ahead of the 15% increase that the company was targeting back in February. Both its platform and devices segments matched the 19% top-line increase, showing strength in both businesses. Revenue growth has accelerated in 4 of its last 5 reports.

Roku also exceeded its guidance at the other end of the income statement. Its net loss narrowed to $50.9 million from a $193.6 million deficit in the prior year's first quarter. The company was bracing investors for a net loss of $90 million.

Its outlook called for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to break even, but it came through with adjusted EBITDA of $40.9 million. Roku has now generated three straight quarters of positive nine-figure free cash flow and adjusted EBITDA north of $40 million. It's not profitable on a reported basis, but it's getting there.

It's a beat, but it wasn't exactly a "beat and raise" performance. It was more of a "beat and braise" showing, with Roku warning of some slow cooking in the near future. Guidance for the current quarter was uninspiring, and Roku warned of moderate growth in the second half of the year that some fear can bleed into 2025.

Someone happy to be channel surfing from the couch.

Image source: Getty Images.

The long road back

There's still a lot to like in sizing up Roku. The 81.6 million streaming households it was servicing at the end of March is a 14% increase over the past year. These accounts streamed 30.8 billion hours of content through Roku's operating system, a 23% increase. Usage outpacing account growth means that engagement is rising. Active accounts are streaming an average of 4.2 hours a day, a new record for the platform.

There will be challenges. Roku competes with some of the largest consumer tech companies and retailers to be the sherpa inside your smart TV. It's also highly unlikely that Roku can continue growing its accounts at a double-digit percentage clip without an uptick in international expansion. It is making inroads overseas, but foreign markets have been harder to monetize at the level of its stateside stronghold.

It's still hard to bet against Roku, but a few analysts lowered their price targets following the report. Roku's iffy glimpse of the second half of this year with sluggish growth and higher operating expenses will bear watching. However, Seaport Research did kick off this week with an upgrade on Monday.

Seaport analyst David Joyce feels that the shares are attractively priced as a major player in the expanding connected-TV advertising market. Well-financed rivals are a well-known concern, but Roku's cost-cutting efforts are paying off.

Joyce was right late last year in suggesting that investor enthusiasm at the time -- with the stock more than doubling in 2023 -- was overdone. Is he right on the optimistic end of the argument this time around?

Roku is in a better place than its three-year stock chart and its year-to-date slump suggest. This is a cash-rich company that's a leader in a growing market. If it does start to falter, it would still be an attractive buyout candidate, given its tech pioneer advantages and substantial audience.

Roku is out of favor with investors now, but it's a streaming service stock that's not out of favor with consumers. Sooner or later, consumers will get their say.

Should you invest $1,000 in Roku right now?

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Rick Munarriz has positions in Roku. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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