When it comes to growth stocks, there are several groups. The most basic two are high-quality growth stocks and low-quality growth stocks. I consider Roku (NASDAQ:ROKU) to be in the former.
Despite heavy doses of volatility, Roku stock has performed quite well over the years.
Roku is currently down 35% from the highs, which makes it a perfect dip-buying opportunity for long-term growth investors. Despite that dip though, shares are still up almost 500% from the Covid-19 lows.
Again, even with the current dip, ROKU stock is still up more than 1,250% in less than four years. If you are a long-term investor in this name, you have clearly accepted the volatility in exchange for robust returns.
The question now becomes, will that trade-off continue?
Roku Stock Is Set for Long-Term Success
In the entertainment world, content is king. Or at least, that’s how the saying goes. That means companies like Disney (NYSE:DIS) are set to dominate for years to come.
However, because of the disruption that Netflix (NASDAQ:NFLX) has caused, content companies like Disney have been forced to change strategies.
These companies increasingly need a direct-to-consumer platform. Many have adapted like Disney and started their own streaming channels. More are doing so every day, but this does less harm to the content companies and more harm to the providers.
Basically, cable and satellite companies are the ones feeling the pinch. But because so many content companies have turned to streaming with their own product, they needed a platform for these services to reach consumers.
That my friends, is Roku.
Think of it like Apple’s (NASDAQ:AAPL) App Store. A collection of apps are available in the App Store. In Roku’s case, a collection of streaming services are available on Roku’s platform.
Apple gets a cut of the revenue generated in the App Store. That’s the price that app developers pay to reach a large audience. Roku operates in the same manner, taking a cut of streaming subscriptions.
In the case where there is free, ad-supported streaming, Roku can generate revenue from this method too. That’s why Roku has some of its own content.
The trend of cord-cutting isn’t going away anytime soon. It’s simply too convenient for the consumer. Additionally, Roku has its strategy focused on international expansion. That should help generate further growth in addition to the larger secular theme we’re seeing with streaming.
The Biggest Misconception About Roku
The biggest misconception about Roku — still! — is that it only sells a streaming stick for the TV. Its hardware business has expanded significantly, with many devices now being built into TVs. But that doesn’t really matter, because this isn’t really a hardware story.
Or rather, it is a hardware story, but only in that it puts the company’s platform right in users’ hands.
As streaming hours gain momentum, so too does Roku’s platform business. One can be skeptical of Roku stock, but to argue that it’s simply a stick is just lazy and ignorant analysis at this point — if you can even call it an analysis.
After growing revenue more than 70% over the last 12 months, analysts expect about 60% growth this year to $2.8 billion.
Never mind that a year ago, estimates for fiscal 2021 stood at just $1.6 billion, meaning estimates have increased by more than $1.2 billion or by more than 75%.
Estimates still call for 36% revenue growth next and 30% growth in 2023. If it comes to fruition (and personally, I think that’s conservative), Roku will generate more than $5 billion in sales in 2023.
With a market capitalization of $42.5 billion, I really don’t see ROKU stock as overvalued.
Of course, it helps that Roku continues to blow past analysts’ expectations, in addition to reporting surprise profits. Now profitable, this is one I want to stick with.
Trading ROKU Stock
Source: Chart courtesy of TrendSpider
For as great a story as Roku stock is, the charts do not reflect the same optimism.
Shares bottomed in May, down just over 40% from the highs.
Remember, down 40% is a threshold that I have pounded the table on before, advocating for the purchase of high-quality stocks.
If Roku breaks $300, it could be heading back down to a 40% drop from the recent high. Should we get further downside, long-term bulls may very well start scooping it back up.
However, shorter-term investors will want to see Roku stock firm up in the $270 to $300 range. A break of $270 puts it below the May low.
On the upside, we need to see a move back above the 200-day and 50-day moving averages in order for bulls to regain control.
— Bret Kenwell
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Source: Investor Place