1 Growth Stock Down Over 85% to Buy Now

Roku Inc. (NASDAQ: ROKU) seems like a stock to run from at first glance. With shares down by over 85% since the heady days of 2021 and profits still to be delivered, it’s hard to make a strong case for the company as a good investment.

But a deeper dive reveals some compelling reasons to pay attention to this former high flyer. For one, Roku still commands a dominant position in the connected television market. In addition, it has some unusual and innovative revenue channels that may very well spark significant future growth.

So, is it finally time to start seriously looking at this former stock market favorite?

Key Points

• While known for its streaming devices, Roku earns 85% of its revenue from advertising, acting as a middleman for over 81.6 million households.
• Analysts expect Roku to become profitable by 2027, driven by its strong market position and adaptability, despite competition from companies like Vizio.
• Roku is set to benefit from the growing trend of free, ad-supported TV, with the industry projected to grow from $7.6 billion in 2023 to $16.5 billion in 2029.

More Than Streaming Devices

While most people know Roku for its streaming devices and smart TVs, the company actually generates a bulk of its top line from advertising.

That’s because Roku’s platform is essentially a technological middleman for over 81.6 million households, primarily in the U.S. It monetizes this platform via advertising, which accounts for 85% of its revenue.

The business model works as follows. Brands pay to have content to be featured on Roku’s home screens and screensavers. Another avenue is The Roku Channel, a free ad-supported streaming service.

There is no doubt that Roku is capitalizing on the growing trend of free, ad-supported television and The Roku Channel is rapidly gaining traction as Americans spend more time watching it than some competitors like Max and Pluto TV.

Industry forecasts suggest the global free ad-supported TV business will mushroom from $7.6 billion in 2023 to $16.5 billion in 2029, with the U.S. remaining the largest market. If those forecasts are right, Roku stands to benefit meaningfully.

Profits or No Profits

While Roku has fared poorly on the bottom line historically, analysts expect it to achieve profitability by 2027, with profits growing in 2028.

Those forecasts stem largely from the company’s strong standing in the streaming market and its ability to adapt to changing consumer preferences. In a nutshell, Roku’s platform is essential for content delivery, even as streaming services explore new growth avenues.

It can’t be overlooked, however, that competition does lurk from companies like Vizio, which Walmart plans to acquire. Vizio’s relationship with over 500 advertisers and 18 million users can’t be discounted, but Roku’s scale and integration into the streaming ecosystem create a strong defense against this threats.

Will Roku Return to Former Heights?

If analysts are right, Roku has meaningful upside to $73.22 per share, suggesting as much as 16% gains for new investors. With that said, a discounted cash flow forecast is much more optimistic and pegs fair value at closer to $76 per share, or 24.5% upside.

Given the company’s dominant standing in the market and the near impossible challenge for rivals to dislodge it, the future is probably much brighter for shareholders than the market is pricing in.

Add to that the likelihood of profitability in the not too distant future and significant growth potential in the ad-supported streaming space, you end up with a pretty attractive reward-to-risk tradeoff.